The new law "On Subsoil”: Some recommendations for improvement

Murat Madykov

Law “On Subsoil” (hereinafter the “Law”) for the Kyrgyz Republic - is the law that covers the industry that generates more than 48% of costs of all industrial products manufactured in the country with the share in GDP - 10.1%, in total exports - 41%, in tax revenues - 11% . The development of this sector of economy is vital for the development of Kyrgyzstan. Therefore it is important to measure thrice and make a very serious work on every provision contained in the draft.

The very next day after this law enters into force, companies and entrepreneurs will be obliged to apply it in their activities and, therefore, actually begin to receive answers to the question of where starts power of the State, and how is it possible to preserve their action freedom, and manage their business. Since the use of natural resources - is a process of interaction between government and business, you need a professionally written and detailed law, a law that would protect the subsoil from unscrupulous officials and, simultaneously, more clearly would describe the commitment of subsoil users and guarantee their rights.

Adopted in July 1997 and the current Law “On Subsoil” are a good basis for ongoing work on the new Law draft. However, the practical application of existing legislation gives reasons to believe that in some cases, existing laws and a number of regulations adopted on its basis should be improved. What should be the new Law “On Subsoil”? Based on previous practice, below we offer some general recommendations, which, in our opinion, legislators should consider when preparing and adopting the new Law.

1. First of all, the new Law should ensure the rights of subsoil user on licensing object, since the validity and integrity of the license is, as a rule, the whole meaning of existence and activities of the company. Current legislation on subsoil provides the grounds for suspension and termination, and provides the right to make such decisions to the licensor, i.e. The State Agency for Geology and Mineral Resources of the Kyrgyz Republic (the “State Geo-Agency”). The issue of suspension or termination of the license must be made on a transparent legislative framework, taking into account the arguments of interested parties. In this regard, there is a need to harmonize the existing order of suspension and termination of licenses in accordance with the Law of the Kyrgyz Republic “On administrative procedures” dated March 1, 2004 No. 16 or granting such rights to court and resolving such issue based on the rules of civil procedure law.

2. It is important that the new Law has given more freedom in the commission of various transactions with the licenses, including the transfer of licenses in the mortgage, which would allow many companies to get loans and to increase the works funding. It is also necessary that a new Law would define the terms and procedure for detention and material terms of such transactions, with regard to the requirements of civil law. Along with the transfer of rights under the licenses, the Law should determine the fate of mining assets (property complex) intended for work at appropriate licensed object.

3. Due to the fact that the subsoil according to the legislation referred to immovable property, there is a requirement of state registration of rights to use them. At the same time, the practice of State Register of the Kyrgyz Republic in this respect is not uniform, and not all bodies of State Register in republic register license and license agreements. And the wording of paragraph 6.26 of the Practical Guide on state registration of rights and encumbrances (limitations) of real estate rights and transactions (Approved by order of the State Agency of Real Estate Registration under the Government of Kyrgyz Republic dated July 27, 2005 No. 107) involves only the registration of subsoil use rights to develop. Consequently, the new Law should give an answer to the question of compulsory registration of subsoil rights, entitled by licenses, as well as transactions for the transfer of those rights.

4. Under current Law the licensee after obtaining a license shall submit to the State Geo-Agency technical project work with the expertise on technical, environmental, safety, protection of subsoil, as well as documents confirming the rights of the licensee on the land under the subsoil use. Whether the license agreement will be signed and the validity of the license will be retained or the license will be revoked depends on performing this duty. It is recommended that the new Law draft stipulates a specific time frame (possibly provide for a minimum period of time) to perform the duties so the company had safeguards against arbitrary establishment period and had sufficient time to prepare the required documents and to pass examinations. Also, we hope that the new Law will provide rules regulating the procedure for making changes and additions to approved by the company and adopted by the State Geo-Agency technical design and procedure for the examination of these modifications.

5. One of the most troubling issues is the possibility of transformation of licenses from one type to another, as it directly affects the validity of subsoil rights and the ability to legally carry out further legitimate work. In our view, the new Law, unlike the previous one, is intended to provide a clear procedure for transformation of licenses from one type to another, to define a list of documents available for this act, to establish a reasonable time for provision and examination of documents, including regulation of decision-making process of the State Geo-Agency on the State balance of mineral reserves inventory and the opportunity to appeal such decisions. Also the reasonable proposal is to make the transformation of a license on a gratuitous basis.

6. No doubt, other troubling issue arising when subsoil use is getting land rights. This becomes especially important when the complexities of obtaining an order of the Government of Kyrgyz Republic on land allotment to companies that are considered as foreign entities in accordance with the land legislation of Kyrgyz Republic. Granting of rights to use land in conjunction with the issuance of licenses for subsoil prospecting, exploration or development would be very progressive step for the benefit of investors. However, the implementation of such initiative entailed with difficulties. For realization of this opportunity required to include the new concept of the state reserve of mineral deposits lands, to provide relevant the State Geo-Agency competencies, to define the boundaries of these lands in the land cadastre documentation and to resolve disagreements with private and municipal owners, to allocate land in nature and to make state registration of the State Geo-Agency rights in the Land Code of Kyrgyz Republic and regulations. Despite the difficulties, as the result of these reforms there will be unconditional benefit for investors, further simplifying and reducing the number of procedures and workflow in the State bodies.

7. The major part of the subsoil users in Kyrgyzstan are companies engaged in geological subsoil explorations, that is, exploration of mineral deposits. Work on the geological exploration carried out mainly on large areas and requires significant financial investment. In addition, exploration does not guarantee an immediate profit and therefore involve many economic risks. Therefore, the State needs to take reasonable actions to stimulate activity on the geological exploration of mineral resources. This requires a very cautious approach in setting and determining the size of the license (rental) payments in the new Law. It is important that the subsoil user companies in addition to these payments are required to pay the bonus and royalties (in the subsequent development of mineral resources), as well as taxes under ordinary tax regime must create a separate land recultivation fund, the company may be subject to import and export duties, as well as companies often produce a fee for using credit. It is likely that excessive payments to the budget will reduce the number of subsoil user companies and, therefore, will become a brake on the industry for a long time.

In addition to the above stated, the Law should be reflecting a high level of legal technique and be firmly integrated into the legislative system of Kyrgyz Republic, to use existing terminology and legal structure, to be based and take into account the provisions of other laws and regulations. Of course, this requirement is purely legal, however, this will provide consistent, stable and investor-friendly practice.

(This article was published in January 2009
in “Expert opinions” section of
International Business Council website)