Dear friends and colleagues!

Effective use of available resources is one of the most important and necessary skills not only for each individual, but also for the state as a whole. The Law of Ukraine “On Concession”, which was voted for by the deputies of the Verkhovna Rada of Ukraine on October 3, 2019 (hereinafter – the Law), is called upon to improve the legal regulation of this area. The law will come into force on February 1, 2020 (except for some provisions).

According to the explanatory note, the current legislation in this area needs to be updated, as the Law “On Concessions”, which regulates concession activities and was adopted in 1999, is imperfect and inconsistent with international best practices.

According to the authors of the law, the application of the concession mechanism will allow the state to attract significant private investment to modernize and improve the efficiency of infrastructure facilities such as sea and river ports, highways, airports and other state-owned facilities.

Let’s take a closer look at what we are talking about and what mechanisms the legislator offers. What is a “concession”?

The law defines “concession” as a form of public-private partnership, which provides granting of the following rights by the concessor to the concessionaire:

• creation and / or construction (new construction, reconstruction, restoration, overhaul and technical re-equipment) of the concession object; and/or
• management (use, operation, maintenance) of the concession object; and/or
• provision of socially significant services in the manner and under the conditions specified in the concession agreement.

In addition, the concession involves the transfer to the concessionaire of most of the operational risk, which includes demand risk and/or supply risk.

Thus, the state, if necessary, has the opportunity to transfer to the concession to the person concerned its own facilities (roads, airports, stations, ports), or a certain amount of rights in order to implement joint socially important projects. The concession agreement may provide for payments of the concessionaire in favor of the concessioner, and vice versa. Terms and procedure for making such payments are determined by the concession agreement in accordance with the law.

At the same time, the Law does not apply to projects that:

• do not provide for investment by the investor in the object of concession;
• provide for the investor to receive full reimbursement of his investments at the expense of the state or local budget;
• do not provide for the creation and/or construction (new construction, reconstruction, restoration, overhaul and technical re-equipment), and / or management (use, operation, maintenance) of the concession object, and / or provision of socially significant services;
• provide for the search, exploration and extraction of minerals.

At the same time, the Law introduces clear regulation of the right of ownership of the object of concession, the purpose of which is to preserve the right of ownership of the object of concession for the state/territorial community.

Let`s consider the principle of concession on the example of highway construction.

Let`s consider the case when a private company initiates the conclusion of a concession agreement in order to build a new highway.

Under the conditions specified in the concession agreement, the concessionaire is granted the right to build and further operate the highway. Motorway construction means a set of road construction and design works related to new construction and/or reconstruction and/or overhaul of a motorway. Funding for such a project can be fully entrusted to the concessionaire or shared between the parties to the concession agreement.

As a result, the road created by the concessioner to fulfill the terms of the contract, which is located within the lane of the highway, is subject to state (or municipal) ownership. At the same time, road service facilities (gas stations, service stations, toilets, etc.) may be owned by the concessioner. In addition, the concessioner has the right to set tolls on such roads within the limits set by the Cabinet of Ministers of Ukraine.

Under such conditions, the state improves its own infrastructure by increasing the network of highways, and the concessioner has the opportunity to recoup part of its own costs and receive profits from the continued use of newly built facilities.

What is the term of the concession?

The term of the concession may be determined taking into account:

• the term of operation of the concession object and the term of its depreciation;
• the term necessary for concessioner to reimburse the investments made in the object of the concession (taking into account the costs incurred in connection with the attraction of debt financing), and to obtain a certain level of profit;
• the period reasonably necessary to achieve the goals and objectives of the concession, as well as the characteristics of the scope and social importance of the project carried out on the terms of the concession.

In this case, the concession agreement is concluded for a period of at least five years and not more than 50 years, except for the term of the concession agreement for the construction and further operation of roads, which must be at least 10 years.

State support of the concession

The law also provides for measures to stimulate concession relations. Thus, state support can be provided to the concessionaire:

1. by paying for operational readiness;
2. by purchasing by the concessioner a certain amount of goods (works, services) produced (performed, provided) by the concessioner in accordance with the concession agreement;
3. by supplying the concessionaire with goods (works, services) necessary for the performance of the concession agreement;
4. by construction (new construction, reconstruction, restoration, overhaul, technical re-equipment) of state, municipal enterprises, institutions, organizations and/or companies, 100 percent of shares of which belong to the state, Autonomous Republic of Crimea, territorial community or other company , 100 percent of shares owned by the state, related infrastructure (railways, highways, communication lines, heat, gas, water and electricity supply means, utilities, etc.), which are not objects of concession, but necessary for the implementation of the concession agreement.

At the same time, state support provided for the implementation of the concession agreement should not cover the bulk of operational risk, which includes demand risk and/or supply risk, and may not exceed the concessionaire’s investment provided for in the concession agreement. Specific forms and the maximum amount of state support are reflected in the tender documentation.

The adopted Law also regulates a number of procedural issues, in particular:

• introduction of a transparent procedure for selecting a concessioner (concession tender, competitive dialogue);
• the possibility of involving advisers and independent experts to prepare a public-private partnership in the form of a concession;
• guarantees for concessioners and creditors;
• features of concessions in markets that are in a state of natural monopoly;
• land issues and urban planning issues for the implementation of projects carried out on concession terms;
• the possibility of resolving disputes in international commercial or investment arbitration;
• introduction of the procedure of control and monitoring of the implementation of concession agreements; etc.

Unfortunately, it is difficult to immediately cite the example of a successfully implemented concession project in Ukraine, which only proves once again the imperfection of the existing model of partnership between the state and private investors. That is why we positively assess the course of bringing the regulatory framework in line with modern market conditions and believe that the adoption of the Law may have a positive impact on the infrastructure of our country and its economic life in general.