PPPs in Ukraine: Improved Rules, New Projects Launched and Future Plans

A public-private partnership (PPP) is cooperation between the state (or municipal bodies) and private entities relating to projects of public interest and significance. PPP projects provide for long-lasting cooperation between a private partner, which undertakes to implement a project, provide services, construct new or rebuild existing facilities and the public authorities which need capital investment and specific expertise from the private partner and otherwise lack the self-capacity to undertake and complete a project.

One of the main advantages of the PPP is the ability to use existing publicly-owned assets, obtain government guarantees, support from the state in solving land access and use issues and secure infrastructure for the implementation of a project as well as other support which would all in all ensure income stability, enabling the project to attract outside financing.

The majority of PPP projects in Ukraine are traditionally implemented in the form of concessions (which is a form of PPP), while joint activity agreements and so-called “public-private partnership” agreements are less common. This is why the Ukrainian government has recently been working hard on introducing improvements to the regulatory framework of concessions, as discussed in more detail below.

Several laws and regulations currently exist that govern PPPs as well as a considerable amount of secondary legislation supplementing primary PPP rules and detailing PPP-related procedures. The key laws in the sector are:

– Law of Ukraine No.2404-VI On the State and Private Partnership (SPP Law); and

– Law of Ukraine No.155-IX On Concession (the Concession Law).

The SPP Law determines the general characteristics for the application of PPPs in Ukraine, while the Concession Law prescribes more specific provisions for implementation of concession projects as one of the forms of PPP.

The Concession Law was adopted on 3 October 2019, replacing its predecessor, the Law of Ukraine No.997-XIV On Concessions, as well as the Law of Ukraine No.1286-XIV On Concessions for the Construction and Operation of Automobile Roads. The Concessions Law has eliminated certain contradictions that existed between the SPP Law, special laws on concessions in different sectors and secondary legislation and made primary and secondary PPP legislation more consistent and coherent. The key idea behind the newly-adopted Concession Law was to balance the interests of private and public partners, thereby fostering attraction of investments, modernisation and development of the new infrastructure in Ukraine.

Advantages of the Concession Law

First of all, the Concession Law revised and broadened the list of eligible partners. The possible parties to concession now include:

i. a concessionaire, a legal entity — resident of Ukraine, that is awarded and is a party to a concession contract; and

ii. a grantor — the government or a municipal authority (or a state-owned legal entity) having power to award and enter into a concession contract.

Secondly, the Concession Law introduced a new and transparent concession award process and concessionaire selection. Even though competitive selection is not new for PPPs, the Concession Law provided for a procedure that complies with the standards of the UNECE, UNCITRAL, World Bank, EBRD and IFC. Such procedure includes a preliminary selection and the actual concession tender and generally includes the following elements:

i. a pre-tender, during which potential private partners are invited to submit their business proposals;

ii. a concession tender, during which a grantor sets up a tender commission, approves tender documentation, adopts a decision on conducting the concession tender, informs the applicants on the pre-selection results and invites them to take part in the concession tender;

iii. an evaluation of proposals, where the grantor determines the best tender conditions; and

iv. an invitation to the winner to execute a concession contract.

Thirdly, the Concession Law introduces changes in relation to an initiator of a concession process (and PPP under the SPP Law). The initiative to enter into a PPP, in general, and into a concession may, in particular, come not only from a state or municipal body, but also from a potential private partner.

Fourthly, the Concession Law provides for improved standards of protection for both public and private partners. For example, parties to the concession contract are free to select a dispute resolution mechanism. For example, mediation, non-binding expert evaluation, national or international commercial or investment arbitration, including arbitration located abroad (if the concessionaire has a foreign element to it), as well as procedural rules for dispute resolution. Furthermore, the Concession Law gives parties a possibility to enter into a concession and associated contracts under foreign law.

Finally, the Concession Law provides for a possibility to enter into a direct contract with creditors. Thus, the creditors, grantor and concessionaire may enter into a direct contract setting out, inter alia, the conditions and grounds for changing the concessionaire, financial obligations undertaken by the concessionaire in favour of the creditor and other terms aimed at preventing the termination of a concession contract.

Risks of the Concession Law

The Concession Law has faced its share of criticism. The main detriment of the Concession Law is that for certain PPPs it provides for the obligation to obtain an environmental impact assessment after performance of the concession contract. Consequently, if the environmental impact assessment results are negative, the concessionaire will not be able to proceed with the PPP project, despite the duly executed concession contract and passed selection procedures.

PPPs currently implemented

Based on the information provided by the Ministry for Development of Economy, Trade and Agriculture of Ukraine, as of the beginning of 2020, 187 agreements had been concluded on the basis of the PPP. Out of these 187 agreements, 52 are being implemented, with 34 on the basis of concession contracts, 16 under joint venture agreements and 2 under other types of agreements. The majority of PPP projects are being carried out in Mykolaiv Region (10), Odesa Region (5) and Kyiv Region (5). The majority of active PPP projects are implemented in the area of water management.

Recent, highly-discussed PPPs concerned the conclusion of concession contracts regarding sea ports in Southern Ukraine. In particular, QTerminals (Qatar) won the concession contract for the Olvia sea port located near Mykolaiv city, and Risoil-Kherson (Georgian and Swiss company) won the concession contract for Kherson sea port. A total of more than 50 companies expressed interest in the said tenders, both international and local.

Future Plans

More concessions are planned to be announced in 2020. Among them are concessions for four regional airports, namely Chernivtsi, Kherson, Lviv and Zaporizhzhia, for which feasibility studies are being prepared.

Concessions for toll roads are also planned. The Ministry of Infrastructure of Ukraine has started feasibility studies for five privately run toll highways: Kyiv-Bila Tserkva, Kyiv’s Ring Road, Lviv-Krakovets (Polish border) and Lviv-Stryi (route to Zakarpattia).

It is anticipated that about in a year, Kharkiv, Dnipro, Khmelnytskyi, Mykolaiv and Chop rail stations could be handed over to private investors under long-term leases. The Ministry of Infrastructure of Ukraine estimates that these five stations could attract USD 20 million in investment.

Concluding Observations

Public and private partners generally consider concession to be the most secure type of PPP due to the extensive legal framework and experience in comparison with other types of PPP. Despite the progressive steps made by the Ukrainian government in developing PPPs, this type of partnership is yet to reach the desired level of success. Unfortunately, in practice, many of the PPPs concluded remain not implemented and PPPs in sectors like health care, waste management, education and mineral extraction are not common.

Nevertheless, a number of ambitious PPPs were announced in various sectors, including infrastructure, sea ports and airports, which are expected to advantageously influence and develop those sectors.