The new draft law on concessions is adopted in the second reading

On 3 October 2019, the Ukrainian parliament adopted in the second reading of the draft law of Ukraine "On Concessions" (the "Draft Law"). The Draft Law introduces a reform of the concession legislation and is aimed at stimulating investment in, and the large-scale development of, Ukrainian infrastructure. The Draft Law unifies several laws regulating concessions (including on the concession of motorways and  roads), aligns requirements in concessions with the public procurement law, and implements best international practices in the industry. The Draft Law has yet to be signed by the President of Ukraine, but this is anticipated and, once signed, will become effective on the day of its publication in the official media.

The main changes relate to the following:

a) Сoncessions become possible in any area of economic activity. Previously, concessions were allowed only in limited areas of economic activity. The Draft Law allows the concession of property of the state and local communities, state and communal enterprises without a limitation on specific economic activity.

b) Term of concession agreement. A concession agreement can be concluded for the term between five to 50 years, with the exception of a minimum duration for concession agreements on the construction and further operation of highways, which is 10 years. Previously, the minimum term of all concession agreements was 10 years.

c) Title to assets. A concession facility may comprise a property owned by different owners (state and municipal bodies). A transfer of a concession facility to a concessionaire, including for its further reconstruction, improvement or re-equipment, does not entail the transfer of the ownership title, and the state or the municipal community retain title to this facility. The concessionaire should return the concession facility, including all constructed immovable assets, to a concession grantor upon the termination of the concession agreement. However, the concessionaire can retain the ownership title to movable property obtained during the performance of the concession agreement.

d) Disposal of assets. If allowed by a concession agreement, a concessionaire can lease out facilities, which are a part of concession facilities. The list of the property that can be leased out by the concessionaire should be included in the concession agreement.

e) Assignment. Pledge. It is now possible for a concessionaire to assign its proprietary rights under a concession agreement upon the consent of a concession grantor. Concessionaires can pledge all of their proprietary rights arising out of a concession agreement upon the consent of the concession grantor for the term of the concession agreement. However, the enforcement of such pledge should result in the replacement of such concessionaire.

f) Direct agreements. A concessionaire can be replaced pursuant to a direct agreement between a concessionaire and a lender where external financing is provided for a concession project. Such replacement can also be made upon the request of a concession grantor if a concessionaire breaches a concession agreement.

g) State support. The Draft Law specifies the types of state support that are available to a concessionaire, namely: payment of commissioning fee to a concessionaire; procurement of goods or services produced by a concessionaire under a concession agreement; supply of goods or services to a concessionaire; and construction of the adjacent infrastructure.

h) Land allocation should be simplified for concession projects.  Under the Draft Law, the land plots required for the implementation of a concession project may be allocated by the relevant concession grantor or the state authorities before the announcement of a concession tender, and should be leased to the winner of the concession tender for the entire term of the concession agreement.

The state and local authorities are obliged to lease out land plots required for concession project implementation. A failure to lease the required land plots within twelve months following the conclusion of a concession agreement will entitle a concessionaire to a right to unilaterally terminate the concession agreement.

i) Leases can be converted into concession. Existing leases of state property can be converted into concessions to obtain the benefits of the concession arrangement.

j) Dispute resolution. The Draft Law envisages different options for dispute resolution. Parties to a concession agreement can choose a negotiation procedure, mediation, expert examination, international or national arbitration etc. As a general rule, disputes arising in connection with execution, amendment, performance or termination of concession agreements should be referred to the commercial courts of Ukraine. The State may waive its sovereign immunity against suit or enforcement of a foreign arbitral award or court judgment upon a request from a concessionaire.

k) The tender procedure for the award of a concession will be substantailly changed. The Draft Law changes the procedure for execution of concession agreements. A concessionaire is selected either in a concession tender, a competitive dialogue procedure or through direct negotiation. Public procurement laws should no longer apply to a concession tender.

l) The concession tender procedure is streamlined. Unlike the previous law on concession, which did not set out a description of stages of the tender procedure, the Draft Law provides for the following stages: pre-qualification, submission of tender bids, evaluation of the bids, as well as signing of a concession agreement.

m) Who can apply. Either a Ukrainian or a foreign entity can apply for the bidding process. A consortium of several entities can also apply. Other than for Ukrainian legal entities whose tender is successful, concession tender winners that are foreign entities shall incorporate a legal entity under Ukrainian Law that will be party to the concession agreement and carry out the concession activity as the concessionaire.

n) Effect on the announced pilot concession projects. On 12 September 2019, the Ministry of Infrastructure of Ukraine announced two pilot concession tenders relating to (i) the assets of State Enterprise "Stevedoring Company "Olvia" and certain assets of State Enterprise "Ukrainian Sea Ports Authority" located at the Mykolayiv port, and (ii) the assets of State Enterprise "Kherson Sea Commercial Port" and assets of the Ukrainian Sea Ports Authority located at that port. According to the transitional provisions of the Draft Law, the existing tender procedure and the procedure for execution of concession agreements shall continue to apply to those procedures already launched, while, the provisions of the Draft Law, including all of its benefits, should apply to the pilot projects.

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