Concession in Ukraine. State partnership. Investments.
Gov partership

Public-private partnership (PPP), as an effective way of interaction between the state and business, is actively developing around the world. Public-private partnerships can take various forms, however, the most common among them is concession. When implementing such projects, PPPs, the state or local authorities, transfer assets to a private partner for a certain period of time. And private partners – invest funds, conduct business in a certain area and use the assets transferred to the management for profit.

According to the European Center for PPP Project Expertise (EUROPEAN PPP EXPERTISE CENTER), in 2019 in the European Union countries 29 major transactions were concluded between member states and private partners with a total value of almost 10 billion Euros. Last year, such a partnership was actively carried out in: Great Britain, Germany, France, the Netherlands and Belgium. The states involved private partners in cooperation in the field of transport, housing and communal services, education and telecommunication services. Also, for the first time, PPP contracts were concluded in Serbia, where partners were involved in the fields of transport (Belgrade airport, transaction value amounted to 420 million Euros) and waste processing (transaction value – 350 million Euros).

In Ukraine, for almost 20 years, public-private partnership relations have been regulated simultaneously by several laws that are not consistent with each other. The PPP mechanism and procedures were too detailed, which quite often led to legal disputes and, as a result, to the insecurity of the interests of private partners. These negative factors have influenced the fact that since 1999, at the national level, not a single successful public-private partnership project has been implemented.

However, in October 2019, the Verkhovna Rada of Ukraine adopted a new Law on Concession, which was soon signed by the President and entered into force. When developing the new law, the practices, norms and standards of European law were taken into account.

As stipulated by the Law of Ukraine «On Concession», the state and local authorities can attract a private investor in the following areas:

– construction and/or operation of freeways, roads, railways, runways at airfields, bridges, overpasses, tunnels and subways, sea and river ports and their infrastructure;

– mechanical engineering;

– collection, purification and distribution of water;

– healthcare and education;

– tourism, recreation, recreation, culture and sport;

– waste management;

– production, distribution and supply of electrical energy;

– the provision of social services, the management of social institutions;

– other.

Currently, officials of the Ministry of Infrastructure of Ukraine say that public-private partnership will continue to be a priority for economic development and attracting investors, and the authorities intend to implement projects on transferring such objects as seaports, airports and railway stations to concessions in the near future.

Therefore, let’s look at what significant changes the legal relations in the sphere of public-private partnership have undergone and what awaits the concessionaire in Ukraine with the adoption of the new law.

  1. The procedure for selecting a private partner has changed towards improvement and new procedures have been introduced:

– concession tender;

– competitive dialogue (can be applied if the concession provider cannot clearly determine the technical and quality characteristics of the project or if it is not known what solutions potential private partners can offer). Such selection is recommended to be applied in case of implementation of innovative projects, large complex infrastructure projects and the like;

– direct negotiations on concession with the tenant of state property.

  1. The minimum period for which a concession contract can be concluded is reduced (from 10 years to 5 years). However, a concession contract on the construction and further operation of roads is concluded for a period of at least 10 years.
  2. The opportunity has been fixed for a private partner to dispose of property rights (part of them) arising from a contract concluded as part of a public-private partnership.

From now on, the concessionaire, in contract with the state partner, may:

– transfer property rights arising from the concession contract to third parties;

– transfer property rights that arise as a result of concluding a concession contract as a pledge.

In fact, the state, having granted the following rights to the concessionaire, expanded its independence in managing the business transferred to the concession.

  1. The mechanism for replacing the concessionaire with another concessionaire is defined. Such a replacement is possible on the initiative of:

 – the concessionaire (in case of significant violation by the concessionaire of the terms of the contract);

 – the creditor of the concessionaire (in the manner of foreclosure on the property rights of the concessionaire arising from the concession contract, which were pledged).

  1. The new law also provides that only a resident legal entity may be a concessionaire. Therefore, to participate in public-private partnership projects in Ukraine, a potential non-resident concessionaire needs to register a legal entity in Ukraine.
  2. Also, the concessionaire has the right to lease part of the property included in the concession facility. The list of such property, the terms of the lease should be determined in the concession contract.
  3. For the first time since the existence of public-private partnerships in Ukraine, the possibility of providing state support to the concessionaire has been fixed at the legislative level. So, the terms of the concession contract may provide for the following forms of state support:

– payment to the concessionaire for operational readiness;

– the acquisition by the concessionaire of a certain amount of goods, work or services produced or provided by the concessionaire in accordance with the concession contract;

– delivery to the concessionaire of goods (works, services) necessary for the implementation of the concession contract;

– construction of related infrastructure facilities that are not concession facilities, but which are necessary for the implementation of the concession contract.

  1. The State also established guarantees for concession entities in markets that are in a state of natural monopoly. The contract, the terms of which provide for the provision of socially significant services subject to state regulation in the areas of natural monopolies, defines:

– the obligations of the concessionaire to compensate the concessionaire for the share of the investments made by it, if these investments cannot be reimbursed due to the establishment by the state regulation body of prices (tariffs) for the relevant services lower than stipulated by the concession contract;

– and/or the right of the concessionaire to stop the fulfillment of investment obligations until approval by the state regulation body of prices (tariffs) for relevant services at the level provided for by the concession contract;

– and/or the right of the concessionaire to initiate the introduction of amendments to the concession contract on the volume and terms of making investments, the terms for accepting the concession object for operation, as well as the performance indicators of socially significant services defined by the concession contract in the manner and on the conditions provided for by the concession contract concession contract.

  1. According to the adopted law, the parties are given the right to freely choose a dispute resolution mechanism, including mediation, non-binding expert judgment, national or international commercial or investment arbitration, including arbitration with headquarters abroad (if the founder of the concessionaire is an enterprise with foreign investment in the understanding Law of Ukraine «On the regime of foreign investment»).

Therefore, as we see, Ukraine took into account the negative 20 years of experience in implementing public-private partnerships, and the new law to some extent protects the interests of investors-private partners. Positive changes in the sphere of public-private partnership are also evidenced by the fact that two major PPP projects were implemented one year after the law came into force – transferred to the Kherson Sea Trade Port and the Specialized Sea Port of Olvia in the Nikolaev Region.

A large number of state and municipal property assets are currently being used inefficiently, and statements by the authorities on further movement towards the development of PPPs contribute to the interest of potential private partners in partnership with Ukraine.

Law Firm «Legal Consulting Center» can help a potential private partner take part in a concession tender and provide comprehensive support at every stage of PPP implementation.

Iryna Korotkova, LF “Legal Consulting Center”

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