New legislation for concessions

Concessions legislation has existed in Ukraine since 1999. However, no infrastructure project in Ukraine has been implemented under concession. Among the main reasons are the complicated procedure of selection of concessionaires and concession terms, problems with determining concession payments and granting of land plots, too strict regulation of concession, which does not take into account international standards for implementation of such projects, corruption of courts, poor protection of property rights, etc.

On October 16, the President signed a law “On Concession”, which was approved by the Verkhovna Rada on October 3, 2019. This law was developed with the involvement of EBRD and IFC consultants and experts, taking into account world experience.

Adoption of this law is important for the development of port, rail, airport and highway infrastructure.

To date, of public-private partnership (PPP) relations have been governed by four laws. Now this is one document that, in addition to the general rules, also defines the features of the concession of certain objects, which were previously regulated by separate laws (for example, a concession for the construction of roads). It defines a concession not simply as a contract, but as a form of public-private partnership, under which the state gives the investor the right to:

  • Creation and/or construction (new construction, reconstruction, restoration, major repairs and technical re-equipment);
  • And/or management (use, operation, maintenance) of the concession entity ;
  • And/or the provision of socially significant services.

All this is in accordance with the procedure and under the conditions stipulated by the concession agreement, and at the same time involves the transfer to the concessionaire of the major part of the operational risk, which covers both demand and supply risk.

For example, the construction of a road under concession is carried out at the expense of the concessionaire, and only after the acceptance of the object of concession in operation and achievement of performance indicators specified by the concession agreement (quantitative and qualitative indicators on the reliability and availability of the object of concession), the concessionaire can claim to offset their costs, in particular by obtaining a road maintenance fee.

Also, the new Concession Law addresses one of the main problems that prevented PPP projects from being implemented – the ambiguity and inconsistency of procedures for initiating such interaction. Thus, the PPP law, recognizing a concession as a form of PPP, defined its procedure for initiating a partnership, holding a competition for the selection of a private partner and resolving other organizational issues. However, the 1999 Law on Concessions established a different procedure for initiating a concession and selecting a concessionaire.

The Law on Concession establishes clear procedures:

  • initiating and deciding on the implementation of PPPs, including concessions;
  • the procedure for conducting the concession tender;
  • selection of a concessionaire (private partner).

They can now be selected through a competition or competitive dialogue, the procedure of which is in line with international best practice (in particular, “Model Regulations for Private Sector-funded Infrastructure Projects”, UNCITRAL). And in the case of concession with a tenant of state property – the results of direct negotiations with him.

The law regulates the list of spheres and participants

Now, concessions cannot be concluded for the following activities:

  • prospecting, exploration and extraction of minerals;
  • mechanical engineering;
  • real estate management.

At the same time, the list of activities for which concession contracts are possible is supplemented by the scope of socially significant services, ie those aimed at ensuring public interests and needs, which should normally be provided by public authorities, local authorities or state, communal enterprises, institutions, organizations, businesses, economic activity whose decisive influence is exercised by the state, territorial community or the Autonomous Republic of Crimea.

We also now have an updated and expanded list of public partners who can conclude state-owned property concession contracts. These are state bodies which, in accordance with the law “On the Management of State Property Objects”, manage state property objects, the Cabinet of Ministers of Ukraine or its authorized body, or at the decision of the Cabinet of Ministers of Ukraine – the National Academy of Sciences of Ukraine and the branch academies of sciences.

In addition, the law also provides for the possibility of a multiplicity on the side of a state partner – several state bodies and / or bodies of local self-government, the National Academy of Sciences of Ukraine, sectoral academies of sciences may act simultaneously.

And not only the concessionaire, the concessionaire and the bidder, as foreseen by the previous legislation, can now be the participants of the concession relations. This circle can now also include users (those who use the object of concession), creditors (financial institutions, international financial organizations that have provided or intend to provide debt financing or have issued a guarantee to the concessionaire to fulfill their obligations under the concession agreement) , independent experts and advisers.

Provisions that intensify concessionary relations in Ukraine

Also, the new Law on Concession contains a number of other rules that protect PPP participants and have a positive impact on the development of this field. Including:

  1. Additional guarantees for concessionaires and creditors (in particular, the right to change the concessionaire to another concessionaire).
  2. Simplification of procedures for allocation of land for PPP projects in the form of concession.
  3. Procedure for transformation of the lease into a concession in case of a corresponding request by the tenant.
  4. The possibility of transferring the settlement of disputes arising from the execution of the concession agreement, international commercial or investment arbitration.
  5. A clear exclusion of public procurement law from relations arising from the execution of a concession agreement. This means that the costs of the concessionaire (public partner) provided for by the concession agreement will not be made through the mechanism of public procurement, but according to the terms of the concession agreement.

Existing and potential projects

The first two of the many objects for the concession were seaports in Kherson and Mykolayiv. A competition was announced at these ports. It was planned to attract investments in the amount of almost 20 billion UAH and increase budget revenues of about 70 billion UAH.

As a result, Port Olbia was given a concession for 35 years and Port Kherson for 30 years. QTerminals (Qatar) has won the concession tender at Olbia Port, investing UAH 3.4bn in port development over 5 years. Rysoil-Kherson won the competition for the concession of the Kherson port, which lasted from September 12, 2019, the company was planning to invest about 300 million hryvnia (investment obligations). However, the Sixth Court of Appeal of Kyiv suspended the order approving the results of the concession tender and determining the winner of the tender for the concession of the Kherson port. The Ministry of Infrastructure will appeal the decision.

 In December 2019, Infrastructure Minister Vladislav Krykliy stated that in 2020 the government will prepare concessions for Mariupol, Berdyansk, Chornomorsk and part of the Odessa port for concession.

Yesterday, the government introduced the Investment Atlas of Ukraine, which discloses the government’s intentions for the concession objects.

In particular, the Cabinet of Ministers plans to lease seven train stations, including the Kyiv-Pasazhyrskyi Central Station, for a term of 20 years. In addition to Kyiv-Pasazhyrskyi, the concession also plans to transfer train stations in Kharkiv, Khmelnytsky, Vinnytsa, Dnipro, Mykolayiv and Chop.

Also among the investment objects that are to be submitted for concession are:

  • Container Terminal in Chornomorsk
  • Ferry Terminal in Chornomorsk Sea Port
  • Passenger Complex in Odesa Sea Port
  • Kyiv Ring Road, connecting two motor roads M-06 Kyiv-Chop and M-05 Kyiv-Odesa;
  • Lviv Danylo HALYTSKYI Airport
  • Kherson Airport
  • Zaporizhzhya International Airport
  • CONCESSION of Central waste facility in Lysychansk City