Date of publication: 7 February 2025
Dmytro Hruba, Attorney
Source: EnergoBusiness
The protracted war in Ukraine has cast its shadow over every sector of the domestic economy. The electricity production and distribution sector are in perhaps the worst condition, as the energy industry has long been targeted by the enemy and suffered significant damage.
One of the legal mechanisms for restoring and modernizing the energy sector could be a public-private partnership (PPP), which can attract significant investment. PPPs can offer attractive advantages for private investors, including state guarantees, partial budget financing, and state-funded development of adjacent infrastructure, among others.
However, for a number of objective and subjective reasons, PPP has not gained widespread popularity in Ukraine, although it has existed in one form or another for several decades.
The most common forms of PPP are concession agreements, investment agreements, and joint venture agreements. According to data from the Ministry of Economy of Ukraine, as of 01 January 2024, 198 agreements were concluded in Ukraine under PPP terms, of which only 22 are currently being implemented (10 concession agreements, 6 joint activity agreements, and 6 other agreements). The remaining 166 agreements are not being implemented, have been terminated, or have expired. Only 10 have been suspended due to the armed aggression of the russian federation.
The official figures speak for themselves: one of the reasons for the unpopularity of this type of cooperation is the complex and lengthy procedure for preparing the partnership process itself. However, war dictates its own rules and the need for a change in approach. The state is taking measures to improve the implementation of PPPs, as this mechanism has been successfully implemented in the EU and elsewhere for a long time.
This thesis is supported by the plans for PPP projects in the energy sector, as outlined in Ukraine’s Energy Strategy until 2050. The latter envisages an increase and modernization of generating capacities, in particular through the expansion of renewable energy sources, among other measures.
Property issues in PPP
One of the key features of public-private partnership (PPP) is the creation and construction (new construction, reconstruction, restoration, capital repairs, and technical re-equipment) of a PPP facility, as well as its management (use, operation, and maintenance).
Article 7 of the Law of Ukraine “On Public-Private Partnership” establishes certain restrictions regarding new and reconstructed facilities that will be operated under PPP, in particular:
- as a general rule, the private partner does not acquire ownership rights to immovable property that is constructed or reconstructed within a PPP framework;
- a private partner shall only have the right of use with respect to such immovable property;
- proprietary rights may be exercised by the private partner (e.g., leasing to third parties or pledging as collateral) exclusively with the consent of the public partner;
- a PPP agreement may stipulate the private partner’s right to lease out a portion of the property included in the PPP facility, provided that such right and the procedure for leasing are expressly regulated in the PPP agreement;
- the private partner is the owner of the movable property acquired for the performance of the PPP agreement, unless otherwise provided therein;
- the law permits that a PPP agreement may provide for the establishment of joint partial ownership between the public and private partners in respect of newly created (constructed) PPP facilities.
At the same time, the Law of Ukraine “On Concessions” contains a provision stipulating that immovable property newly constructed by the concessionaire (the private partner) based on and in accordance with a concession agreement shall be deemed state or municipal property.
Thus, in the case of a concession, the private partner cannot even claim the emergence of joint partial ownership in the constructed facility.
These provisions may often appear unattractive for a private partner; however, they must be taken into account when planning a partnership with the state. At the same time, the state should arguably reconsider its approaches to property-related matters in PPPs in the direction of more liberal regulation.
Land Issues in PPP
It is difficult to imagine the implementation of a public-private partnership (PPP) in the energy sector without addressing land-related matters already at the planning and preparation stage of a future project. These include, in particular:
- conducting a detailed legal due diligence of specific land plots (if already formed) intended for use within the PPP, as well as of immovable property located within their boundaries;
- identifying and terminating the rights of current land users (if any);
- developing, coordinating, and approving land management documentation (land planning documentation or technical documentation) for the purpose of forming a land plot or plots, including by means of their division and/or consolidation to obtain the desired geometric configuration, changing their designated purpose (if necessary), and terminating land rights of current users (if any);
- obtaining resolutions of the competent authorities to grant land plots for use, registering land rights in the State Register of Property Rights to Immovable Property, and establishing easements in respect of land plots not directly involved in the PPP project (for example, for the laying of utility networks and communications), among other matters.
Currently, the law provides that a private partner may claim the right to use a land plot necessary for implementing a PPP, including on concession terms, under a lease for the duration of the respective PPP agreement.
At the same time, the law does not contain clear provisions for regulating land use within PPPs, offering only general norms and referring primarily to the relevant sectoral code. The Land Code of Ukraine, in turn, indeed sets out several specific rules regarding the formalization of land rights for the private partner, in particular:
- the lease of land for a PPP is carried out without competition, i.e., without land auctions;
- certain procedures for the development and approval of land management documentation are assigned to the public partner, with reimbursement of financial costs by the private partner;
- restrictions are imposed on the alienability of land plots indicated in the decision on the feasibility of a PPP project;
- the law provides for the possibility of terminating the rights of certain land users over land to be used for a PPP project, without requiring their consent;
- time limits are set for transferring land plots to the private partner, among other provisions.
In practice, resolving land use matters may prove lengthy and may be delayed either by the public partner or by the landholder (which are often different entities), and statutory deadlines may turn out to be largely declarative. Furthermore, several responsibilities may, in practice, be shifted onto the private partner.
All of this must be carefully considered when planning a PPP, particularly during the negotiation of the future agreement, by clearly detailing the procedure for fulfilling obligations and the consequences of breach by either party.
The law also allows the public partner to carry out certain preparatory actions for organizing the tender to select a private partner, including the formation and state registration of property rights to land plots required for the PPP project.
This opportunity should be utilized, since the formation of a land plot, its registration in the State Land Cadaster – which usually involves the preliminary development, coordination, and approval of the relevant land management documentation, if necessary – and the subsequent registration of rights to the land under the competent authority (a state body or a local self-government body) is a fairly lengthy process.
PPP can and should become an effective instrument for the restoration and modernization of Ukraine’s energy sector, the implementation of Ukraine’s Energy Strategy 2050, and beyond. When approached properly, it can be mutually beneficial for all parties in various sectors of the economy. The only question is whether all participants are ready for honest and open dialogue and effective cooperation. The state, for its part, should give serious consideration to two issues: the liberalization and clarification of legislation in this area, and ensuring its effective enforcement.
Recommendations for investors to ensure successful PPP implementation
Both foreign and Ukrainian investors, before deciding on a project, should thoroughly examine the advantages and disadvantages of each form of PPP (concessions, investment agreements, joint activity agreements, etc.), and gain a clear understanding of the future partnership in terms of property rights, the condition of immovable assets, and the potential for constructing new facilities or reconstructing (including capital repairs) existing ones.
Investors should also carefully consider the options and possibilities for the potential allocation of rights to future immovable property. In addition, it is essential to pay due attention to land-related matters by conducting a comprehensive legal due diligence, particularly in order to assess the feasibility of future construction works and the overall implementation of the PPP project.
We further recommend that investors insist on resolving a number of land-related issues already at the project preparation stage, as this could significantly save both time and costs during the course of implementation.
