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6 November 2020

New dynamics in the infrastructure PPP and privatisation projects in Ukraine

Following successful launch of the pilot Olvia and Kherson seaports concession projects, interest to the Public Private Partnership (PPP) projects in Ukraine took on a new spin. There have been various amendments to the PPP and concession legislation and, besides, several new PPP projects have been announced in 2020. The government keeps pursuing privatisation projects in the port sector, which, despite being significantly delayed, are expected to kick-start in the following years.

Key changes and trends

Below are some of the most notable changes and key trends on the Ukrainian PPP and privatisation markets of 2020.

I. Updated legislative framework for PPPs and concessions

The updated PPP legislation, including the laws of Ukraine “On concession” and “On the PPP”, which entered into force right after the first concession tenders had commenced in October 2019, removed a number of obstacles to PPPs in Ukraine. Since the above laws were enacted, a number of supplementary legislative acts have been issued to this effect, including:

  • Resolution of the Cabinet of Ministers of Ukraine “On approval of the Procedure for involving advisors for the preparation of the project carried out on the terms of the concession”, 09.10.2020, No. 950
  • Resolution of the Cabinet of Ministers of Ukraine “On approval of the Methodology for calculating concession payments”, 12.08.2020, No. 706
  • Resolution of the Cabinet of Ministers of Ukraine “On approval of the Procedure for returning the concession object to the concessionaire after the termination of the concession agreement”, 22.07.2020, No. 621
  • Resolution of the Cabinet of Ministers of Ukraine “On approval of the Procedure for replacement of a private partner (concessionaire) under an agreement concluded within the framework of a public-private partnership (concession agreement)”, 01.07.2020, No. 541

Moreover, the Resolution of the Cabinet of Ministers of Ukraine “Some issues of organisation of public-private partnership”, 11.04.2011, No. 384, as amended on 22.04.2020, introduced the new procedures for holding PPP tenders and conducting efficiency analysis of the PPP projects.

These efforts to enhance attractiveness of the Ukrainian legal framework are expected to gain investors’ confidence and promote participation of the private sector in the upcoming PPP projects in Ukraine. However, while the need for infrastructure development in Ukraine remains strong, enactment of the further PPPs enabling legislation shall be a welcome development.

II. Unsolicited proposal opportunities

Aiming to foster a new dynamic in the PPP projects in Ukraine, the government improved the terms for unsolicited proposals by private investors. An investor may find an asset of his interest, develop a feasibility study and present a potential project to the relevant public partner. Pursuant to current PPP legislation, in case an unsolicited proposal is found feasible by the public partner, the initiator is entitled to obtain a significant incentive in the evaluation of its bid, such as a priority right to be awarded the contract. In cases where the contract is awarded to the other investor, the initiator of the respective PPP is generally entitled to compensation for costs associated with preparation of the relevant feasibility study.

Ukrainian government welcomes unsolicited proposals from domestic and foreign private investors for both regional and national projects, including in the following sectors:

  • ports and terminals (for example, recently the Minister of Infrastructure announced that the government was interested in receiving unsolicited proposals regarding Izmail and Berdyansk seaports)
  • airports
  • roads
  • municipal infrastructure (for instance, water and waste treatment)
  • social infrastructure (for instance, hospitals and schools)

There is, however, no detailed procedure for submitting unsolicited proposals by a private partner, as well as no criteria for assessment of proposals or the list of projects in relation to which the government welcomes a private initiative. To date, a few unsolicited proposal initiatives have been already initiated by private partners in Ukraine.

III. Chornomorsk seaport concession projects

The legislative improvements are expected to give rise to many investment opportunities in various sectors of infrastructure in the upcoming years. There have been several ongoing PPP initiatives in the port sector that are expected to move to the tender stage within the next two years.

The first one is a concession for the railway and ferry complex of the Chornomorsk Ferry Terminal. The project is financed solely from the state funds and will soon undergo a feasibility study. The Ukrainian Sea Port Authority has just recently hired a private consultant for such purpose. The tender may be announced shortly after the completion of the feasibility study.

Another project for the upgrading, financing and operation of the Chornomorsk Container Terminal is currently at the stage of selecting consultants to perform a pre-feasibility study. This project is financed inter alia by the EBRD and the IFC which assist the Ministry of Infrastructure of Ukraine with identifying and selecting a private concessionaire. When a pre-feasibility study is completed, the stakeholders will decide whether this project will be undertaken.

IV. Roads PPP

Another important sector that may also see a turning point in the upcoming years is the PPP for the roads. The recent changes include unblocking a mechanism for making payment to private partners through amending the Resolution of the Cabinet of Ministers of Ukraine “On approval of the Procedure for directing funds from the state road fund”, 20.12.2017, No. 1085, that occurred on 29 August 2020. Further, the new Road PPP Program (Program) has been announced in October 2020 (specific Program’s website).

The key features of the Program are listed below

  • the Program is run by the Ministry of Infrastructure of Ukraine, the State Agency of Automobile Roads of Ukraine, the SPILNO PPP Management Office in cooperation with the International Finance Corporation, the Global Infrastructure Facility and the World Bank
  • the Program aims to attract USD 9 billion of private investment to rehabilitate 9,000 kilometres of roads in Ukraine until 2030
  • it is expected that there will be up to 25 road PPP projects launched within the Program
  • the government has already identified 6 pilot road sections to be upgraded and maintained within the framework of the Program in the course of 2020-2023
  • the pilot road PPP tenders for one or two projects are expected to be announced already in autumn 2021
  • the pilot road PPPs will consist only of the brownfield projects
  • the projects are not expected to be structured as tolling concessions
  • the investment model used for the projects will be the availability payment contract where the government makes payments to the private partner that are contingent on achievement of certain performance standards and project milestones

While the launch of the Road PPP Program is undoubtedly an ambitious step, only the time will show whether it will attract private investors and eventually produce long-term contracts. One of the final steps for kick-starting the Program is amending the budget legislation to ensure a legal framework for the long-term financing of the road concession projects by the government.

V. Privatisation projects in the port sector

Another recent initiative of the government is privatisation of port infrastructure facilities, in particular, property complexes of the state stevedoring companies. To this end, three Ukrainian seaports in Skadovsk, Belgorod-Dniester and Ust-Dunaysk have been identified as pilot privatisation projects.

Nevertheless, the process of privatisation of the above seaports, announced by the government last year, has been constantly delayed and rescheduled. Preparations for the launch of the Ust-Dunaysk seaport privatisation project were commenced in December 2019 and to date the government is still in the process of their finalisation. Recently the government declared that this project would launch in the second half of 2021. Prospects for privatisation of the Skadovsk and Belgorod-Dniester seaports are currently unclear.

Nevertheless, in case the efforts of the government will be accelerated, the seaports privatisation projects may still be launched in the following years.

Outlook

Today’s infrastructure needs of Ukraine are significant and they continue to grow. Despite the potential of the Ukrainian infrastructure PPP and privatisation markets, their further development will largely depend on the political will of the government and its desire to implement such projects despite the continuing resistance from a number of stakeholders. The government’s ability to offer financial assistance in the respective transactions, as well as confidence of private investors in the Ukrainian legal regime, will also be important.

More information on the lessons learned from the pilot sea-ports concession projects where Sayenko Kharenko team was deeply involved can be found via the link.

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