Today, concessions are the most popular type of public-private partnership (both in Ukraine and abroad), but currently almost all concession projects in Ukraine are small and implemented in the area of housing and communal services (collection/purification/distribution of water and collection/removal/recycling of waste). However, the concession mechanism, subject to its proper legal framework, may be used both for large-scale infrastructure projects (ports, railways, aviation and roads), as well as for the effective possession and management of state assets that are not subject to privatization.
The concession concept appeared in Ukrainian legislation in 1999, with the adoption of the Law of Ukraine “On Concessions”. Today, there are already 4 laws governing the issue of concessions in general and for certain sectors/facilities. However, the relevant laws offer regulation that is not very attractive to investors, offering the incomprehensible and complex mechanism for transferring facilities to a concession. In recent years, negotiations on the need to improve concession legislation, which would increase the attractiveness of Ukraine as a concessor, have been actively held.
On 03.04.2018, The Ukrainian Parliament passed in the first reading Draft Law of Ukraine No. 8125 “On Concessions” (hereinafter referred to as the Draft). The first presentation of the Draft, which had been developed with participation of EBRD experts, was held in September last year. Even then, it was stated that the Draft was intended not only to harmonize existing concession laws, but also to take into account the requirements of European legislation in the relevant area. We suggest to discuss in more detail the specific provisions of the Draft, trying to understand its advantages and potential shortcomings.
So, unlike the current legislation, the Draft stipulates that initiators of concession proposal preparation may be not only executive authorities, local self-governments, ARC and state-owned enterprises, but also investors (both residents and non-residents). Undoubtedly, such an innovation is positive and will allow investors to invest in projects that interest them.
In general, at the moment, the Draft provides for the transfer of a particular facility to a concession on the basis of a concession tender. At the same time, in certain cases, the Draft allows concluding a concession contract without conducting a respective tender – through direct negotiations. The relevant decision may be taken by the Cabinet of Ministers, when it is necessary to guarantee national security and defense, when works (services) can be performed by only one person (in cases of know-how, copyrights, etc.) or when a positive conclusion is obtained following an effectiveness assessment of the concession implementation following the analysis of the person’s proposal. On the one hand, it looks like a simplification of the procedure for investors, but on the other hand, this possibility contains certain corruption risks.
An interesting innovation in the Draft is the possibility of actually transforming a lease of state-owned facilities into a concession. The Draft provides that a concession contract can be concluded without holding a tender through direct negotiations with the lessee subject to meeting certain requirements: regarding the term of the contract, the absence of significant violations of the lease agreement, the lessee’s compliance with the requirements set by the concessionaire, etc. Unfortunately, the Draft provisions regarding such a transformation have not yet been finalized. In particular, it is unclear what to consider as a significant breach of the lease agreement, and what should be included in a conceptual note that is to be submitted by the lessee in the process of preparing the proposal regarding the concession.
It is worth paying attention to the issue of providing the concessionaire with a land plot for the implementation of the project. According to the Draft, conditions for the provision of such a plot, as it is now, constitute essential conditions of a concession contract. Unlike the Draft, the current legislation did not contain detailed conditions for the allocation of the relevant land plot. Instead, the Draft stipulates that the formation of the respective land plot is provided by the concessor, but all expenses associated with it are then compensated by the concessionaire. The Draft also provides that in the case of failure to grant the concessionaire the right to use the land plot within 9 months, he has the right to terminate the contract unilaterally. It is still unclear whether in such a case the concessionaire will be able to recover his losses and whether his registration fee (the amount of which is sufficiently significant and may amount to 500 minimum wages) will be returned to him.
Just as the current legislation, the Draft provides for the possibility of transferring to the concessionaire certain rights and obligations of the company, which assets have been transferred to the concession. At the same time, the Draft contains more detailed provisions on the succession of a concessionaire, which is possible in case of dissolution of the company, which entire property is transferred to the concession. Such succession includes, inter alia, the transfer of rights and obligations in court proceedings, open enforcement proceedings, as well as the company’s earnings. This provision can hardly be considered attractive to a potential investor, as it may lead to significant additional and unpredictable expenses. Undoubtedly, the Draft’s provisions regarding the possibility of the parties to choose a concession contract mechanism and a procedure for resolving disputes between the parties to the concession contract in national, international commercial or investment arbitration sound good. The current legislation also provided for the possibility of resolving disputes in an international arbitration court, but the Draft has more detailed provisions in this regard.
The Draft also contains a number of other short innovations, including regarding the payment of concession fees; the possibility of concluding a concession contracts with the next participant (in case of not concluding a contract with the tender winner); the possibility of involving advisers (for developing proposals and tender documentation), international financial organizations, etc. In addition, the Draft contains specific provisions regarding construction/operation of motor roads under concession conditions, when the conditions for conducting the respective concession tender are to be approved by the CMU.
In general, the Draft looks fairly integrated, but the implementation of some of its provisions would require the adoption of by-laws (for example, on monitoring the implementation of concession contracts, the inspection of leased facilities to be transferred to a concession, the involvement of advisers). It should be noted that the adoption of the Draft will require the introduction of certain amendments to the Law of Ukraine “On Public-Private Partnership”, which contains general provisions for the implementation of all forms of such partnership, including concession.
In general, the Draft makes it possible to create a transparent and simple concession mechanism (subject to its proper revision), which should contribute to the improvement of the investment climate in Ukraine. We hope therefore that the Draft will be improved in the near future and finally adopted by the Parliament, especially in view of the recent official launch of the concession projects regarding SE “Stevedoring Company “Olvia” and SE “Kherson Sea Commercial Port”, the selection of a concessionaire for which may be performed under the new procedure.
Sergiy Benedysiuk, Head of corporate and M&A
Anna Kremnova, senior associate, corporate and M&A
exclusively for «Yurydychna Gazeta», №15 (617), 10.04.2018