The New Investment Environment for Public-Private Partnerships in Ukraine

The focus of these projects was healthcare, transport infrastructure, energy, mechanical engineering, and agribusiness. Now the question is whether Ukrainian PPP projects are promising enough in the eyes of private investors. Today the Ukrainian healthcare market is estimated at USD 4.9 billion. However, state-owned and municipal clinics in Ukraine that provide 90% of services fail to satisfy the market’s demand in both the scope and quality of healthcare services needed by the patients. 

Despite the fact that the On Public-Private Partnership Act was adopted in Ukraine as early as 2010, a World Bank’s report mentions only two implemented projects under this law. There are two main reasons for this delay. The first one is that the project launch procedure is complicated, expensive, and requires a mandatory assessment of project efficiency and risks at the investor’s expense – but provides no guarantees that the investor carrying out that assessment will eventually be awarded the contract (due to the competitive selection of investors). The second reason is that the state does not provide any long term (i.e., over one year) financial guarantees due to budget legislation. As a result, PPP transactions are usually based on the legislation defining the legal regime of specific contracts (e.g., concession, joint venture, management, lease, etc.), and not under the Act On Public-Private Partnership.

In 2016, the Ukrainian Parliament attempted to rectify the situation. In May an amendment to the On Public-Private Partnership Act came into force and expanded the scope of guarantees for investors. For instance, investors now have the right to suspend the fulfillment of their obligations if the prices for their products, which are regulated by the state, are economically unjustified. Another improvement is the newly introduced right to settle disputes via international arbitration. The Parliament is also considering changes to budget laws that would allow the state to provide long term financial guarantees in PPP projects.

So what forms do PPP projects take in Ukraine, and why?

The most commonly-used forms of PPP projects are: (1) concession and (2) lease of state-owned and municipal property. Currently, large infrastructure and industrial structures such as plants, ports, and roads may be among the objects of concession. Concession is one of the few forms of PPP (along with financial lease) which allows private investors to eventually obtain priority right to buy-out of the state-owned property.

Lease remains the most regulated and safe option for investors. An investor may lease the whole property or some part of it (i.e., a building or its section), and may also renovate or introduce technical modernization or other improvements to the leased property at its own expense and be compensated for it. In some instances, following these improvements, the investor may become an owner of this property. The law does not state the maximum period of lease, but usually the assets are leased for at least 10 years.

A joint venture agreement involves the combination of the assets and/or organizational resources (stake) of the public and private sector parties to carry out a joint project. In Ukraine, the state’s stake in a joint venture can be no lower than 50%, which cannot be overruled by contract. The maximum lifespan of a joint venture is not legally defined and is up to the partners to determine.

So far, management contracts have been seldom used in PPP, which is partly due to their novelty in the Ukrainian business environment. At the same time, this is the most flexible form, since the law does not yet dictate any mandatory provisions. Acquisition of management services by the state will be carried out through the mechanism of public procurements, including e-system “ProZorro.” The law does not limit the duration of management contracts, though the default term is five years. The amended version of the On Public-Private Partnership Act mentions management contracts alongside concessions and joint ventures, so we can expect it to be used more often. 

Ukraine carries significant potential for PPP projects. And while in the past legislation did not provide solid procedures and guarantees for private partners, the situation now is rapidly changing.

By Tetyana Gavrysh, Managing Partner, Inyurpolis Law Firm

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.