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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

Attracting Investors. How Will the Law on Concessions Work

23.06.2018

Ivan Bozhko, Attorney at Law, Insolvency Receiver

Source: Liga.Business

Will the new Law on Concessions be able to raise money for the Ukrainian infrastructure?

The foreign investments are of critical importance for the emerging economies such as Ukraine. For the purpose of their attraction the existence of certain economic, political and social conditions, that is, the constituent elements of the investment environment, is vital.

Pursuant to the statistical information of the National Bank of Ukraine, in 2017 the net direct foreign investments amounted to USD 1.8 billion, which is by 43.7% less than in 2016. This decrease is attributed to the slow-down in the pace of reforms, corruption and political instability.

The government decided to overcome the negative tendency by expanding the practice of public-private partnership (PPP) by adopting a new Law on Concessions.

What is the PPP and what is it needed for?

This is an agreement between the state and the investor under which the latter undertakes to create or restore the object of real estate or infrastructure facility and subsequently transfer it to the state, while the state gives such an investor the right to operate the concession object for a certain period of time and to receive income from its operation.

The conclusion of such agreements is a quite effective way to attract investments, create modern infrastructure and new work places. For example, in a period between 1990 and 2009 about 1400 PPP agreements signed in the EU attracted investments totaling to EUR 260 billion. The fact that concessions need to be given the greatest attention is evidenced by the fact that in Ukraine it accounts for 82.5% of all projects of such cooperation between the state and investors.

What is new in the Law on Concessions?

The composition of parties to concession relations is now significantly expanded. Thus, the creditors, international financial organizations involved in the development of feasibility studies (IBRD, EBRD, IB, etc.), independent experts participating in the work of the selection commission with an advisory vote, as well as advisers, which undertake to conduct the feasibility study within the framework of project, develop tender documentation and render other services, may now participate in the procedure. It is believed that the new participants will ensure an objective and transparent selection of concessionaires, and the projects themselves will become more effective.

It is noteworthy that now it is suggested to allow the foreign companies to participate in the concession if they are registered as the association of private legal entities only (while the current version of the Law on Concessions does not prohibit the non-residents to apply as a bidder in a competition for concession). After winning the competition, they are obliged to establish a legal entity in Ukraine. However, there are a number of restrictions on applicants. For example, those legal entities registered in the offshore or in the jurisdiction recognized by the Verkhovna Rada as an aggressor state, as well as those the beneficiaries of which are the residents of the aggressor state, are not allowed to participate in the competition.

From now on, it is not only the state, but also the private companies which may initiate proposals for PPP in the form of concessions.

The competition to select the concessioner is not obligatory now. Along with the competitive selection, the contracts may also be concluded via direct negotiations. The authors believe that such an approach will help increase the number of concession objects and will attract more companies interested in the concession. At the same time, in order to avoid the abuse of a non-competitive procedure, it will only be allowed in a number of cases, such as the ensuring of national security and defense, the ability of one person to perform the work (due to the existence of certain copyrights, know-how, etc.) or in case of receiving the concession offer from the current tenant of the state-owned property.

Among a number of other changes introduced the following should be mentioned: the decrease in the minimum term of the concession agreement from 10 to 3 years, an increase in the amount of registration fee (instead of the current amount of up to 10 tax-free minimum incomes of citizens – which totals to UAH 8810 – the amount of up to 500 minimum wages, or up to UAH 1.8615 million is proposed) and a detailed definition of the criteria used for evaluation of the financial and economic side of the bids. In addition, after the adoption of a new Law on Concessions the potential concessioners will be able to conduct a competitive dialogue with the concessor to develop the technical and qualitative characteristics of the project, as well as specific financial and legal decisions on their implementation, but this will apply only to the innovative and large integrated transport infrastructure projects.

The draft law proposes to compromise with the potential investors. For example, to allow the state financing of concession projects, in particular, in the form of payments for the concession object readiness (at the moment the state may only make payments in the form of state aid to the loss-making and low-profitable objects of social importance). In addition, the parties can freely choose a dispute resolution mechanism, including mediation (a way to resolve conflicts with the involvement of the third independent party – Ed.), non-binding expert evaluation, national, international or investment tribunal.

In general, the draft law provisions seem to be interesting for both foreign and domestic investors, and can provide new perspectives in the creation and implementation of important infrastructure projects, as well as in the attraction of foreign capital to our country. The major objects that will probably be of interest to the potential concessioners are the automobile roads, seaports and airports, waste processing and recycling facilities, energy, social and medical sectors.

 
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