Ukraine is improving its legal framework for public private partnerships and concessions, obviously preparing to rebuild its infrastructure. On 24 February 2016 the Ukrainian Parliament adopted Law of Ukraine No. 817-VIII "On Amending Certain Laws of Ukraine Regarding Removal of Regulatory Barriers to Developing Public Private Partnerships and Encouraging Investments to Ukraine". The proposed amendments will increase the level of certainty and protection of investors in such transactions.
- The Law limits the definition of a public private partnership to the cases falling within its main features. Such features include transfer of the rights to manage, use or operate an asset, including items developed on a PPP basis; long-term nature of PPP transactions; risk transfer; and introducing the investments. Consequently, it is now easier to define what will not qualify as a PPP: for example, lease of public property without investing into it, joint ventures for construction of schools and hospitals without managing the same, motor road construction projects without any risk transfer, all agreements effective for less than five years, etc.
- The Law makes another attempt to distinguish between the PPP Law and special laws. When available, a special law shall apply. This provision, however, still allows application of the PPP Law to some of the procedures when they are not governed by the special law, to wit: project initiation, private partner selection, agreement preparation, etc. The PPP Law also applies if the proposed agreement is a so-called "mixed" agreement, which is the one containing elements of different agreements: for example, contractor agreement, services agreement, buy-sell agreement, or other. Our practice shows that most complex PPP agreements are of a mixed nature. However, to assess the nature, one should draft the agreement first, which is usually a later stage of the PPP process.
- Successful bidders often involve so-called "special purpose vehicles" to deliver projects. This option is now set out in the Law. The Law further details certain conditions and responsibility of the successful bidders for performance by their SPVs. The state-owned and municipal enterprises and business companies that are fully owned by the central government or local communities may also be parties to the agreement on the side of a public partner, with the latter remaining responsible for their performance.
- The financing partners may sign the PPP agreement on the side of a private partner. They may, in particular, request that the public partner replaces the private partner if the latter fails to perform its duties. In the foreign practice, such arrangements are usually formalized by a separate direct agreement. The solution so suggested, however, may appear effective as well.
- Apart from fixed amounts, concession payments may now be also calculated as a percentage of the value of asset or net income, or even contributed with assets in kind, or a combination of the above. A grace period for concession payments may be granted for the construction stage.
- Private partners may acquire ownership to the facilities under construction, or a share in it, and use them as a security upon consent of the public partner.
- The ways to provide governmental support to private partners are expanded to also include: apart from government guarantees and public funding, payment of so-called "other payments", including the availability fee; purchase of a stipulated amount of goods, works or services; or supply of certain goods, works or services for the purposes of the project. In practice, we believe that the competent drafting of an agreement will allow to bring various compensations and reimbursements, usually envisaged by the financial structures of PPP agreements, under the definition of the aforesaid "other payments".
- The amendments provide certain protection for private partners against imposition by the government of economically unjustified regulated prices and tariffs, including by incorporating a mandatory investment component in such price or tariff and by entitling the private partner to propose changes to the investment scope and schedule in such case.
- If an agreement is terminated due to the public partner’s failure to perform it, the public partner must reimburse the private partner for any investments made and losses incurred by the latter.
- The parties may resort to international arbitration for disputes under PPP agreements involving non-residents and companies with foreign investments and choose the venue for hearing such disputes.
- The Cabinet of Ministers, when executing a PPP agreement, may waive state immunity.
The Law supplements the list of spheres to apply PPPs with the following: energy saving technologies, residential construction and repair projects in the territory of the anti-terror operation (ATO), construction of temporary housing for internally displaced persons, etc. It further specifies duties of the public partner and the procedure for providing the private partner with land rights. The Law clarifies the procedure for analyzing the effectiveness of a PPP and the decision-making procedure, as well as the powers of respective authorities. It contains some other amendments as well.
The Law will enter into effect on 24 May 2016.
Our experience shows that some problematic issues still remain unresolved, such as: the currency fluctuation risks of private partners and financing institutions, the change in law risks, including changes in tax laws, and some other issues. As always, we are ready to deal with these issues when drafting an agreement. After all, the Law does indeed remove many regulatory obstacles. Whether PPPs will start in Ukraine soon or not is, among other factors, the question of economic and political stability in the country, etc. But at least one may now speak of better drafted and investor-friendly laws in this sphere.
Author: Alexander Borodkin