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23 February 2021

Infrastructure development through an unsolicited PPP proposal in Ukraine

Source: UJBL

Public-private partnership (“PPP”) can be described as a way of delegating provision of public and municipal services to the private sector. Due to the commonplace budgetary constraints, PPP can be an efficient solution for tackling infrastructure issues that require both proper management and large investments. PPP allows to bring know-how, technologies and investments of the private sector to the public infrastructure without eliminating the public sector supervision. Considering a current stage of the Ukrainian infrastructure (see e.g. a presentation of the EBA Infrastructure Index) it is hard to imagine how, other than with a solid investments from private sector, Ukraine’s infrastructure value may significantly increase.

Furthermore, in Ukraine, the PPPs may be initiated by the parties from both public and private sectors. The latter kind of initiative is termed “unsolicited proposal”. The main difference between the two kinds is the distribution of efforts at the preparatory stage of the PPP project. In a traditional competition-based PPP procurement, the government shall collect all available information about technical, financial and legal characteristics of the respective asset before inviting expressions of interest or requests for proposals and prepare a feasibility study. In case of an unsolicited proposal, the legal, technical, financial and economic feasibility of the project shall be evaluated and presented by the investor himself, while the government is only required to review and accept (or reject) the proposal.

Currently, the unsolicited proposals are not common in Ukraine. The updated Law of Ukraine “On Public-Private Partnership” (the “PPP Law”) adopted by the government in 2019, explicitly provides that unsolicited proposals from the private sector companies are permitted.  Even before the revision, such unsolicited proposals were allowed, although we are not aware of any instance of such proposal were successfully implemented by  private investors at that time.

While the unsolicited proposal concept is not defined anywhere in the Ukrainian legislation, the following broad definition may be suggested based on the analysis of the core legislative acts on PPPs in Ukraine:

An unsolicited proposal is an unprecedented concept of a public-private partnership project based on a comprehensive feasibility study, prepared by a private company and submitted to the relevant public sector authority for its acceptance and implementation.

Thus, to stand a chance of being implemented, an unsolicited proposal in Ukraine shall meet at least the following basic criteria:

  • it shall be unprecedented, which, in terms of article 10(1) of the PPP Law means that the unsolicited proposal may be agreed by the public party if its initiator offers a unique proposal that is not in the government’s pipeline. In particular, the unsolicited proposal can be adoptable if it does not fully or partially coincide with the project in relation to which the relevant public sector authority (i) has made a decision to launch a feasibility study within the last year, or (ii) is carrying out the analysis of the project’s effectiveness
  • it shall be prepared in the form of a feasibility study, meaning that it shall comply with the requirements set forth in the Procedure for conducting an analysis of the effectiveness of the public-private partnership, approved by the Resolution of the Cabinet of Ministers of Ukraine No. 384, dated 11.04.2011 (the “Procedure”) (para. 8)
  • it shall be prepared by a private company, which means that the proposal shall originate only from a private company or companies, as defined in article 1 of the PPP Law
  • it shall be submitted to the relevant public authority(ies) responsible for analysing effectiveness of the PPP project’s implementation depending on the assets involved in the proposed project

The “relevant authority” shall mean the authority which manages the relevant assets or another authority as defined in article 11(2) of the PPP Law. For example, for the state-owned ports and airports such authority shall be the Ministry of Infrastructure of Ukraine and for the local water and waste treatment facilities – executive body of the relevant local self-government.

The PPP Law and other legislative acts of Ukraine do not contain a detailed guidance as to the terms, conditions or timing for the submission and consideration of unsolicited proposals by the public sector authorities. Nevertheless, based on the available legal framework, the following main pre-tender stages of a PPP project initiated by a private party can be defined:

Under Ukrainian law, if the unsolicited proposal is accepted by the public partner, the project will follow the regular PPP procurement procedures.

The law, however, provides for quite generous rewards to the initiator of the adopted unsolicited proposal:

  • if the promoting party participates in the relevant tendering for the PPP project, it shall be entitled to obtain an incentive in the evaluation of its offer. In particular, the initiator enjoys a priority right to be awarded the contract even when its bid is not winning if “he agrees to enter into an agreement on the terms of the bid that received the highest score” (article 14(1) of the PPP Law)
  • in any case, if the initiator does not participate in or does not win the tender, its reasonable and verifiable costs incurred in relation to the proposal’s preparation can be reimbursed by the winning company (article 14(1) of the PPP Law)

Therefore, unsolicited proposals are subject to the same analysis as the projects that the state or local authorities propose by themselves. They also proceed through the same procurement process as the projects initiated by the public side. Accordingly, there is no substantial difference between the solicited and unsolicited proposals in this regard. However, in case an unsolicited proposal is found feasible by the public partner, the initiator is entitled to a significant incentive in the evaluation of its bid, such as a priority right to be awarded the contract.

Recently, the governmental and local authorities started encouraging unsolicited proposals that might contribute to the infrastructural development of Ukraine. 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)
  • railway stations (Ukrzaliznytsia has recently expressed its interest in receiving the proposals from the investors in relation to the concessions of the railway stations)
  • airports
  • roads
  • municipal infrastructure (for instance, water and waste treatment)
  • social infrastructure (for instance, hospitals and schools), etc.

There is however no defined list of projects or assets in relation to which the government encourages unsolicited proposals. The public information on the unsolicited proposals submitted by private investors in Ukraine is also rather scarce. Hence, the key risk for a private initiator of a new PPP project in Ukraine is that it might invest significant resources in developing a feasibility study and its consideration by the relevant state authority, while the latter will not be in a position to accept it due to various reasons. In this case, the initiating investor will get no compensation from the public sector.

While preparation of an unsolicited proposal for an infrastructure project is a resourceful exercise requiring significant amount of the advance planning, it might be a beneficial option for the government since it reduces the burden of a PPP project preparation for the public partner.

To properly employ this option and increase the number of unsolicited proposals in Ukraine in the coming years, it is necessary to, inter alia, improve the legislative framework in terms of elaborating the terms, conditions and timing of preparation and submission of unsolicited proposals, particularly:

  • to provide a legal framework and procedure for negotiations and information exchange between the public and private partners at the stage of preparing an unsolicited proposal
  • to provide a mechanism and steps that precede submission of the unsolicited proposal (e.g. discussion of the project’s concept, its approval by the public partner, preparation of the draft unsolicited proposal, discussion of the draft, etc.)
  • to draft a formal procedure for submitting unsolicited bids by the private sector
  • to regulate the issue of overlapping private proposals and their prioritization order, etc

There continue to be a strong demand for infrastructure in Ukraine and 2021 is expected to be an active year for those who are involved or plan to be involved in the Ukrainian PPP market. We expect that the trend for unsolicited proposals will mature in the next few years and the government will continue improving the legal framework to provide more clarity with respect to the relevant procedures. Once legislation and practice on the unsolicited proposals develop , both local and international investors may be more keen to go down the private PPP route to build and maintain much-needed infrastructure in Ukraine.

In this respect, much will depend on the continued support of the further PPP initiatives in port, rail, aviation and road sectors from the international financial institutions, such as IFC and EBRD which have already provided extensive assistance to the Ukrainian government in implementation of the pilot Olvia and Kherson sea-port concession projects.


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