Significant improvements to the laws governing public-private partnerships in Ukraine

On 24 May 2016, the Law of Ukraine “On Amendments to Certain Laws of Ukraine to Eliminate Regulatory Barriers for Development of Public-Private Partnerships and Stimulation of Investment in Ukraine” (the “Law”) became effective. The Law introduces a number of important changes to the principal laws regulating public-private partnerships (“PPPs”) in Ukraine, including the Law on Public-Private Partnerships and the Law on Concessions. Below we summarise those amendments which could have a significant impact and be of the most benefit for stakeholders.

PPP Parties

Private Partners. Pursuant to the Law, the possibility to execute a PPP agreement with the public party will not be limited solely to the winner of the tender, but may also include a special purpose vehicle (“SPV”) organised by such winner for purposes of implementing the project, provided that the winner of the tender retains a greater than 50% participatory interest in such SPV for the duration of the PPP project.

Public Partners. The Law has broadened the list of parties that can act as public partners. Now, in addition to state bodies and municipalities, both state-owned and municipal companies in which the state or the relevant municipality holds 100% participatory interest may also act as public partners. Previously, it was unclear whether such parties could act as public partners.

Step In. Although the Law has not introduced the classic “step in” clause, it envisages that a party who finances a PPP project or arranges for its financing can be a party to the PPP agreement. Such party will also be able to request the public partner to change the private partner under the PPP agreement in case the original private partner does not fulfil its obligations under the agreement.

Title to PPP Assets

Build-own-operate-transfer. An important provision introduced by the Law is that a private partner is now expressly permitted to acquire ownership of assets created or acquired by such partner in the course of performing the relevant PPP project. A newly created or acquired PPP asset can also be jointly owned by a private and public partner.

Notwithstanding the foregoing, the private partner will ultimately be required to transfer such assets to the public partner at a certain point in the future. Also, the acquisition of ownership title will not be possible in the case of existing state-owned or municipal assets, which must remain in state or municipal ownership at all times.

Disposal. Until an asset is transferred to the public partner in accordance with the PPP agreement (and unless such agreement provides otherwise), the private partner does not require the consent of the public partner to pledge or lease such an asset, or to contribute it to a joint venture.

State Support of PPP Projects

New Options. Parliament has introduced new options for a public partner to support a PPP project. In particular, in addition to providing state or municipal guarantees and budget financing, the public partner can now also support a PPP project by paying a completion fee to the private partner, or by acquiring goods, works or services that are produced or performed by the private partner in furtherance of the PPP agreement.

Concession Payments. The Law provides that a concessionaire can be exempt for a specified period from the requirement to make concession payments under a concession agreement that provides for construction of a new object or completion of an uncompleted object, provided that, in case of an uncompleted project, such period cannot exceed 6 months from the commissioning of the project.

Access to Land. Pursuant to the Law, a public partner is obligated to grant to its private partner the right to use land plots which are required for the performance of the PPP project. Such rights are transferred to the private partner on the basis of the relevant PPP agreement. If the public partner is not authorised to dispose of land required for the project, it must ensure that the relevant authorised body provides such land to the private partner in due course.

Guarantees for Private Partners

Regulated Prices. In case the prices for goods or services which a private partner is expected to produce or render as part of the PPP project are subject to state regulation, such prices should include an investment component sufficient to compensate the private partner for the cost of attracting investment in the project. The relevant PPP agreement may also provide for alternative mechanisms to ensure compensation of such cost to the private partner.

Right to Terminate. The Law allows the parties to a PPP agreement to provide for the right of the private partner to terminate such agreement or to suspend the fulfilment of its investment obligations under the agreement, in case the regulated prices do not provide sufficient compensation of investment costs to the private partner and the agreement does not provide a sufficient alternative compensation mechanism.

Right to Reimbursement. If a PPP agreement is terminated due to an action or inaction of the public partner, the latter will be required to reimburse the private partner for all investments made into the project, unless they have otherwise been compensated in the course of the project. The parties to a PPP agreement can also provide for the public partner to pay damages incurred by the private partner as a result of a termination of the PPP agreement due to the public partner’s fault.

Dispute Resolution

Foreign Arbitration. The Law expressly permits any disputes arising under or in connection with a PPP agreement to which a non-resident private partner is a party to be referred to international arbitration, including real estate disputes so long as they do not relate to acquisition, termination or registration of property rights to real estate.

Waiver of Sovereign Immunity. According to the Law, in PPP agreements executed by the Cabinet of Ministers of Ukraine as the public partner, the State may waive its sovereign immunity against suit or enforcement of a foreign arbitral award or court judgment, provided that Parliament approves such waiver.

In addition to the above, the Cabinet of Ministers of Ukraine is to further adopt certain implementing regulations. Nonetheless, it is expected that these recent legislative changes will make public-private partnerships a more interesting and viable option for attracting investments in Ukrainian infrastructure and can be viewed as evidence of willingness on the part of the State to cooperate with private investors.

If you would like to receive further information in connection with the above, please contact Olexiy Soshenko.