Date of publication: 23 July 2020
Andrey Bychkov, Counsel, Attorney at Law
Sergey Nedelko, Attorney at Law, Head of Odesa Office
Source: Ukrainian Law Firms 2020
Concession is regarded as one of the most widespread, effective and progressive forms of public-private partnership (PPP) in the world. For any country, concession is a tool of economic growth and increasing its competitiveness, attraction of management resources and sophisticated technologies, as well as modern organization of industrial processes which, at the same time, enables budget costs to be reduced. From an investor’s perspective, concession enables risks to be shared with the State, guarantees protection of the concessionaire’s rights and requires the State to contribute to the proper performance of investment projects.
According to the State Property Fund, over the entire period of Ukraine’s independence since 1991, 144 concession agreements have been concluded, 136 of which relate to municipally- owned property, whereas only eight of them relate to state property in the highways, energy and coal industry sectors. This shows that, until recently, the concession instrument did not work efficiently in Ukraine, as no major infrastructure project has been completed in all of these years. The main reason was obsolete and inconsistent concession legislation, the lack of clear and transparent rules and excessive bureaucracy.
On 3 October 2019, the Ukrainian Parliament adopted the long-expected Law of Ukraine On Concession No. 155-ІХ, which came into force on 20 October 2019 and provides for a number of innovations and changes to legislation on concession, which should revive the concession mechanism by creating a favorable legislative environment for investing.
This legal instrument enables concessionaires to create, construct, manage concession assets and provide socially important services pursuant to the terms of a concession agreement. The Concession Law sets out, inter alia, a uniform procedure of initiating and making a decision to carry out PPP projects in the form of concession; implementation of transparent concessionaire selection procedures (concession competition, competitive dialogue); the possibility to involve external advisers and independent experts; replacement of concessionaires; simplified land allotment procedures for the purposes of concession projects; the possibility to transform lease into concession; the possibility to refer a potential dispute to international commercial or investment arbitration; the possibility of initiating a concession by a potential concessionaire; a clear mechanism for controlling and monitoring the execution of concession agreements; regulation of issues relating to ownership of concession assets etc. The Concession Law also regulates the specifics of concession involving construction and exploitation of highways and concession in the natural monopoly markets (this primarily relates to the port industry). We shall focus briefly below on some of the key innovations contained in the Concession Law.
Initiating the Concession
The process of preparing proposals for a concession project can be initiated not just by the State, local government authorities, state or municipal enterprises or organizations but also by private companies (residents of Ukraine and/ or non-residents) or even their associations. In such case, a prospective concessionaire must submit a proposal, together with a project feasibility report, to the state authority responsible for managing the relevant asset owned by the State. If the asset is owned by a municipality, such documents must be submitted to the executive bodies of the relevant local government. These bodies are authorized to analyze and assess the efficiency of the proposed concession project in accordance with Resolution of the Cabinet of Ministers of Ukraine No. 384 of 11 April 2011. A decision on whether to implement the proposed concession project is made in accordance with the procedure set out in Law of Ukraine On Public-Private Partnership No. 2404-VI of 1 July 2010, which has also been substantially amended.
Legal Regime of Concession Assets
The assets that can be granted under a concession arrangement include integral property complexes as well as individually specified assets, which are not under lease. The provision of an existing concession asset to a concessionaire, including its further reconstruction, restoration, capital repair, technical re-equipment by such concessionaire cannot lead to the transfer of legal ownership over such asset to the concessionaire. The immovable property, newly-constructed by the concessionaire under a concession agreement, is owned by the State or the relevant municipality. The concessionaire has the right to lease out part of the concession asset, which can make commercial sense in light of the specifics of the production process, seasonal factors and other aspects.
Another progressive provision of the Concession Law expressly sets out the right of a concessionaire to pledge its property rights under a concession agreement. However, only the full range of such rights can be pledged and the concessor’s approval must be obtained for this. Such pledge can only be enforced by replacing the concessionaire which is done by signing an additional agreement between the concessor and the new concessionaire. This instrument allows a concessionaire to raise additional financing. For example, finansing can be raised by way of loans from international financial institutions, against security in the form of the rights under the concession agreement, which is common practice around the world.
Some Essential Terms of a Concession Agreement
The validity period of a concession agreement can be at least 5 years and no longer than 50, except for concession agreements for the construction and maintenance of highways, which can be concluded for a minimum of 10 years. Unlike concession initiators and participants of the concession competition, who can be both Ukrainian residents and non-residents or their associations, only Ukrainian residents can be parties to a concession agreement. The State, local governments, state-owned and municipal companies, institutions and organizations can act as concessors. The essential terms which must be contained in a concession agreement also include the subject of the agreement (i.e. the type, amount, description of works/services to be provided under the agreement); the rules governing the establishment and change of prices (tariffs) for the goods (works, services) produced (performed) by the concessionaire; a procedure for returning the concession asset; conditions for granting of State support; a procedure for exercising control over the performance of the agreement, etc.
Regulation of Land Issues
The Concession Law provides for the lease of state-owned or municipal-owned land plots, which are required for the implementation of the concession project, to the concessionaire for the entire period of the agreement. Authorized state executive bodies and local authorities are required to transfer the land plot(s) set out in the concession agreement for the use of the concessionaire. The relevant amendments have been introduced to the Land Code of Ukraine. If the land plot is not granted to the concessionaire within one year after the agreement is concluded, the concessionaire is entitled to terminate the agreement unilaterally and claim compensation for any losses incurred. The procedure for granting land plots required for the implementation of the project and a detailed list of such land plots are among the essential terms which must be contained, according to the Concession Law, in the concession agreement.
Guarantees of the Concessionaire’s Rights
The Government is obliged to ensure stable conditions for the implementation of concession projects and respect for the concessionaire’s rights and legitimate interests. Concessionaires are provided with an equal business regime which excludes any discriminatory measures. If state or local authorities adopt any decision that injures a concessionaire’s rights, the losses incurred by the latter as a result of such decisions must be compensated for in full in accordance with the concession agreement.
Dispute Resolution
The Concession Law provides the parties to a concession agreement with the freedom to choose a dispute resolution mechanism. Among such mechanisms are mediation, non-binding expert opinion, national or international commercial or investment arbitration, including foreign seated arbitration. This provision is aimed at ensuring fair and impartial trial which is one of the key requirements posed by any foreign investor. Concession agreements are, by default, governed by Ukrainian law but the parties may include a different provision in their agreement.
As we can see, Ukraine’s Concession Law brings a number of positive and progressive provisions in line with worldwide practices. It is designed to ensure a clear, comprehensive and transparent mechanism for carrying out concession tenders which should create a positive environment for foreign investments.
In January 2020, the results of the first tenders for the concession of the ports of Olvia and Kherson were announced. These pilot concession projects attracted around 30 companies from all over the world. The winner in the Kherson port is the company of the Swiss-Georgian holding RISOIL S.A., which offered a variable concession fee rate of 7%, a fixed concession fee of around UAH 12 million, investment commitments in the amount of UAH 300 million and UAH 18 million investments in the local infrastructure. QTerminals (Qatar) has won the concession tender for the port of Olvia with its proposal, which included UAH 3.4 billion investment commitments for the next 5 years, an annual concession fee of UAH 82 million and investments of UAH 80 million in the infrastructure of Mykolaiv Region.
The Government is currently making preparations for concession projects in the ports of Mariupol, Berdyansk, Odessa (passenger complex), the ferry terminal in the port of Chornomorsk; railway stations in Mykolaiv, Kharkiv, Dnipro, Khmelnytskyi, Chop (Zakarpattia Region); regional airports in Lviv, Kherson, Chernivtsi and Zaporizhia; a number of highways.
Government officials have been repeatedly emphasizing that they consider concession as the most desirable PPP instrument for the development and modernization of the infrastructure in Ukraine. This relates primarily to sea and river ports, highways and airports. The positive changes in the concession legislation prompted by the Government’s efforts to breathe new life into the country’s infrastructure can be seen by investors as an indication that Ukraine now has both political will and operable laws to support concession projects.
