EU-funded Project: Coal Sector Policy Support Program EC-Contract – 2008/141-542 MASTER PLAN

1. EU-funded Project: Coal Sector Policy Support ProgramEC-Contract – 2008/141-542MASTER PLAN September 2008 – June 2011 Beneficiary: Ministry of Energy and Coal Industry of Ukraine

2. Project’s objectives • Assist the Ukrainian government in developing and implementing its coal sector reform policy. • Advance the development and restructuring of the coal-mining industry in a socially-responsible and cost-effective manner, • Improve mine safety standards • Help to eliminate ecological damage. Page 2

4. Coal consumption projections

5. Analysis of the Ukrainian coal sector • Strong points: • big deposits of all types of coal • big deposits of anthracite • long tradition and experience in coal mining • well qualified workers • well qualified technical managers • network of coal industry research institutions • large number of coal mining equipment producers • well spread transport infrastructure Page 5

6. Analysis of the Ukrainian coal sector (cont.) • Weak points: • low productivity of State mines • often high sulfur and ash content in coal • high gas concentration in mines • difficult geology • weak business management in mines • worn out and outdated equipment • poor safety records of State mines • poor quality of coal processing Page 6

7. Analysis of the Ukrainian coal sector (cont.) • Opportunities: • expansion of exports to China, Turkey, India and EU (low S coal) • potential for the development of the new mines • underground gasification • utilization of methane • potential for development of power stations based on lignite • possible export of coal-based energy to SE and Central Europe • recycling of waste (reprocessing of tailings) • utilization of underground water • production and sale of briquettes made of coal and biomass Page 7

8. Analysis of the Ukrainian coal sector (cont.) • Threats: • corruption and weak business management in the coal sector • new anti CO2 regulations could threat export and domestic use • import of coal from countries like Russia, Kazakhstan, South Africa, Indonesia, Brazil or Australia • possible shortage of suitable equipment for refurbishment of mines • possible collapse of elements of infrastructure (mainly railways) • possible shortage of qualified miners in very near future • outdated research in mining and geology • low capacity in ports constrain development of export • lack of stability in business regulations Page 8

9. Five core elements of the Ukrainian coal sector reform program Privatisation program Mine closure program Occupational Health and Safety program Environmental mitigation program Social mitigation program

10. Outline of Coal Sector Reform

11. Key elements of Presidential reform • Liberalise the coal market, sale and pricing mechanisms • Remove restrictions on import of mining equipment • Privatise all viable enterprises of the sector and close the non-profitable coal mines • Re-channel subsidies from subsidizing the production cost into investment in work safety Page 11

12. Preconditions for successful reform • 1. Improved legal and regulatory framework • review of the existing laws and regulations, esp. related to privatisation, mining concessions, investments protection, bankruptcy procedures, social mitigation issues, pensions, public utilities, health system, local governance 2. Institutional strengthening and changes • establish an inter-institutional governing body coordinating actions of all affected by the coal reforms • establish an institution for the liquidation of non-profitable mines • establish an institution for coordination of measures for protection of redundant and retired miners • reduce number of institutions who have right to inspect mines

13. Preconditions for successful reform (cont.) • change the functions of the Ministry of Energy and Coal Industry to reflect the free market conditions in the coal sector, perhaps consider establishment of the “coal authority” of Ukraine • the newly created institutions should report directly to the Council of Ministers and operate as small, efficient and transparent agencies • upgrade the existing mining trade schools system 3. Preparation and introduction of Free Market conditions • close down “Coal Ukraina” alternatively privatise it under the very strict supervision of the Antimonopoly Office • reforms in the coal and energy sectors should be closely coordinated in view of opportunities for vertical integration

14. Preconditions for successful reform (cont.) • selected illegal mines should be legalised, the rest must be closed • coal mining companies to be transformed into legal entities • import and export of coal should be liberalised • coal prices should be based on the free market principle • consider privatisation of the institutes related to the coal industry • remove restrictions on import of the mining equipment • stop subsidies to non-profitable mines and direct resources to improvement of mine safety, mitigation of social effects of reforms, speedy closure of mines, assistance to former parts of mines like local infrastructure, transport • introduce a royalty system (2-7% of the selling price of coal at the mine)

15. Preconditions for successful reform (cont.) • increase the geological search for the new deposits of coal • provide free access to information about the new coal deposits to attract investment in new mines • make sure that the mining licence and conditions for it’s obtaining are very clearly defined from the outset • conditions should include the applicant’s expert mining knowledge, existence of the mining plan, existence of the development concept (scope, timetable, costs) • Involve all key stake holders (unions, local community, local and regional authorities etc.) at the beginning of the process of change

16. Conditions for successful privatisation • Successful privatisation has to be open, transparent and non-discriminatory • Ukraine has to be made more attractive as a place for doing business by serious improvement in the following areas: • starting a business • obtaining construction permits • registering property • paying taxes • trading across borders • closing a business 3. Improvement of the legal and institutional framework for • land purchases and property rights • required licences and approvals for them • further simplification of the tax system with less red tape and better transparency

17. Conditions for successful privatisation (cont.) • reform of the commercial courts system • creation of efficient insolvency/bankruptcy laws • removal of international trade barriers in the sector • Coordination of privatisation efforts in coal energy and transport • gradual reduction of subsidies in all sectors • breaking up of state monopolies where possible and market liberalisation • enforcement of anti-monopoly laws 4. Develop an extensive investment promotion program for Ukraine 5. Establish Strategic Assets Privatisation Agency, alternatively set up a new division at the State Property Fund to increase efficiency of the process

18. Privatisation process Appoint experienced foreign investment banks and large consulting companies to execute privatisation and approach donors for funding (EU, World Bank, USAID, EBRD) Each “privatiser” should be responsible for privatisation of one pool of about 10 mines Inform and prepare all stakeholders well in advance of privatisation Incorporate the mining companies Privatise mines debts free. All state and para-statal debts should be written off at the moment of privatisation Separate non-core business from the mines (local water supply, district heating, cultural facilities etc) Prepare a short brochure (teaser) for each mine to be privatised

19. Privatisation process (cont) Provide absolutely free access toALLinformation about the mine toALLpotential buyers participating in privatisation Consider privatisation through liquidation Do not allow for private investment in state mines prior to privatisation Use money from privatisation to solve social and ecological issues in the mining areas As soon as possible start the pilot privatisation program of 7 to 10 mines in order to flush out some unexpected constrains (esp. legal issues) Expected cost of privatisation of one mine should be about UAH 3,5 mln (about UAH 280 mln for all mines recommended for privatisation)

20. Privatisation Programme

21. Privatisation Programme (cont)

23. Closure of mines • possible in 15-24 months, not like currently in 15-24 years • possible sale of all sellable assets of the closed mines in the privatisation process • possible international technical assistance (esp. from Germany and Poland) • possible donors financial assistance

24. Closure of mines process • Review and update the existing legal framework • Assess and analyse the institutional framework currently responsible for the mines closure. Introduce proposed changes • Decide about the list of priority of mines for closure • Decide on appropriate methodology for each mine closure • Prepare detailed technical project for each closure • Prepare and implement the physical liquidation of underground infrastructure and then surface infrastructure • It is proposed that the Regional Coal Restructuring Agencies should manage and overview the closure process

25. Mine closure program

26. Mine closure program (cont)

27. Mine closure program (cont)

28. - Social Mitigation Measures (SMM) is a multi-disciplinary task; it requires systematic reforming in several policy areas - SMM should be coordinated at the highest possible level as it touches upon a wide range of policy areas, including Social Policy, Labour Market, Education, Economy, Industry Development, Trade, Regional Development, Health, Finance, Justice, etc. - SMM should be implemented firstly on community level; - Appropriate communication and coordination mechanisms should be in place to ensure that social mitigation measures reach the targeted beneficiaries - For SMM to be successful with tangible effects on local level, money must be allocated for affected communities to allow for the implementation of SMM, e.g. in form of grant schemes. Key elements of the social program

31. Key elements of the environmental program - continue with assessment and maping of pollution of mining sites - develop risk assessment-based environmental management of closed mines - improve training of the environmental staff of mines - strenghten the environmental staff - improved environmental management of mines will increase overall mines performance

34. Key elements of the OHS program - change of work culture - introduce OHSAS-based work safety management system - introduce of OHS standards complying with EU directives and ILO norms - improve standards of preventive medicine in the mines - improve degasification and utilisation of methane

39. Summary of costs Cost of privatisation transactions: UAH 280 mln Cost of mines closure of 29 mines: UAH 4 000 mln Social mitigation costs: UAH 1 000 – 1 800 mln Environmental mitigation cost: UAH 4 000 mln Initial improvement of safety standards: UAH 125 mln

40. Financial provisions for program implementation • Funds partly provided from privatisation of mines • Loans and grants byinternational financial institutions and donors • Technical aid of international institutions • Funds allocated from the budget of Ukraine