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9 March 2021

Countdown to the launch of the Road PPP Program in Ukraine

After its announcement in the late 2020, the Road PPP Program (Programme) developed by the Ukrainian government with support of the World Bank’s International Financial Corporation (IFC) and Global Infrastructure Facility (GIF) has attracted considerable attention from both private investors and contractors.

With the completed pre-feasibility study for six pilot projects identified below, the government has already communicated its intention to finalise the feasibility study and launch the first three tenders still in 2021.

During the past few months, the government together with IFC, GIF and the European Bank of Reconstruction and Development (EBRD) which had also joined the project, has come a long way in creating an enabling legal environment for the Programme’s launch. However, despite various amendments to the PPP legislation, some areas still need to be addressed and improved to create a solid basis on which the PPP Road Programme can be developed.

These will be brownfield projects pursued as availability or performance-based payments transactions. Under this PPP project finance model, a private investor is allocated responsibilities for design, build, rehabilitation and/or maintenance of public roads under a long-term contract with a public partner. In return, the private investor receives milestone payments agreed in the contract and usually made upon acceptance of services or works available at a contractually-defined quality by the public partner.

It is expected that the State Road Agency of Ukraine, Ukravtodor will act as the public partner in the upcoming road PPP projects. It will be responsible for management of the country’s national road network. Ukravtodor is not a separate state company or a special purpose vehicle created for managing these projects (in contrast to, for example, SE Guaranteed Buyer in the Ukrainian renewable energy sector), but a budget agency with the creditworthiness of the state.

Potential private partners will be expected to have sufficient technical experience in the road sector, as well as good financial standing. Thus, we expect that a consortium of companies consisting of international, local contractors and a sponsor could be a suitable candidate for a private partner for the upcoming road PPP projects.

However, the payment obligation of the public partner in the PPP availability payment projects is subject to the ability of the government to secure the relevant budget funds for the duration of the project. In this sense, public securities for the payment are especially relevant in such PPPs as the concessionaire’s income is directly dependent upon the state’s capacity to pay. In Ukraine, PPP projects can last from five to 50 years and it is, therefore, crucial to ensure that the state will be able to perform its payment obligations during the project’s life.

Currently, due to the three-year maximum budget planning principle fixed in the legislation, the public partner is unable to make a long-term commitment to implement PPP agreements. Absence of legal framework for the long-term financing of the road availability-based PPPs in Ukraine makes these projects more risky for private investors. Thus, availability of the relevant legal framework is critical for the launch of any availability-based PPP projects.

In line with this objective, two alternative draft laws, Nos. 5090  and 5090-1, “On amending the Budget Code of Ukraine on settlement of budget relations during the implementation of agreements concluded in the framework of public-private partnership, including concessions agreements” have been prepared and submitted to the Parliament by the Cabinet of Ministers of Ukraine and the members of the parliament in February 2021.

Both draft laws are generally aimed to give a greater comfort to potential private partners by providing the mechanism and conditions for the long-term state payment commitments for PPP projects’ implementation. As to the road PPP projects, the draft laws include the following key changes:

  • all payments to be made by the state within the framework of the PPP projects shall be provided in the annual state budget law
  • the overall annual payment obligations of the public partners under the road PPP projects shall not exceed 30 per cent (under the draft law No. 5090-1, which also includes the obligations under non-PPP maintenance contracts in the road sector) or 50 per cent  (under the draft law No. 5090) of the revenues accumulated in the special Road Fund of the state budget
  • the procedure for directing funds from the state Road Fund shall be determined by the Cabinet of Ministers of Ukraine in separate legal acts
  • the Ministry of Economic Development, Trade and Agriculture of Ukraine shall provide information on the performance information throughout the life of the PPP project in the budget performance report on the annual basis
  • the long-term commitment taken within the framework of a PPP project shall have the status of a budget commitment in the amount determined in the relevant contract

Enactment of the relevant legislative amendments in the budget legislation shall indeed be a big step towards implementation of the bankable PPP road projects in Ukraine. While there is a chance that the relevant tenders may indeed be announced this year, the first road PPP projects cannot be launched without the required reform of the budget legislation.

As of today, it is unclear whether and which version of the draft law will be finally approved by the Ukrainian Parliament. Nevertheless, in case these efforts to establish the relevant legal framework will have the results, we expect investors and lenders to be very keen to consider partnering with international and local contractors for investing in pilot road PPP projects in Ukraine and the first three will be launched very soon.

Sayenko Kharenko will closely monitor the development of the Road PPP Programme and will be ready to provide turnkey support to foreign and local contractors, as well as to sponsors who may be interested in targeting the pilot projects.

 

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