New Draft Law on Concessions

It is a well-known fact that in the last couple of years the Ukrainian port industry has been in dire need of attracting large-scale investments to create new and port infrastructure objects and update  existing ones.

Businesses are ready to make such an investment while state authorities understand that such a measure is paramount in order for the industry to function successfully (since the state cannot complete this task on its own).

Despite this, the process for private investment in domestic ports has been developing far from how we’d like it to. The main reasons for this include the imperfections of Ukrainian legislation regulating relations in the field of investing in the public sector of the economy.

In particular, concession, which is one of the most widespread investment forms in international practice, is hardly used in Ukraine, while the port industry has not seen actual implementation of a single concession project. In fact, the present version of the Law of Ukraine No. 997-XVI On Concessions was adopted back in 1999, so it is completely outdated and does not meet current market requirements or correspond with the current realiae of port industry development.

Both domestic and foreign experts have stated time and time again that concession legislation needs to be updated to meet international standards.

As time went by, their message was finally heard — the Ministries of Infrastructure and Economy of Ukraine initiated development of a new Draft Law On Concessions (hereinafter — the Draft Law), attracting international experts, while the EBRD agreed to finance it.

Leading lawyers and port industry experts, including the team at ANK Law Firm, were involved in this work.

The beginning of this year saw the preliminary version of the Draft Law published on the website of the Ministry of Economy of Ukraine¹, which should be registered in Parliament very shortly.

Let’s consider the main innovations proposed by the Draft Law.

Simplified Procedure for Decisions on Implementation of a Concession Project

Current concession legislation provides a difficult path for deciding on implementation of a concession project and conclusion of a concession agreement. This way involves mandatory coordination with at least four ministries — the Ministry of Infrastructure as the managing body and Ministry of Economy as well as the Ministry of Finance and the Ministry of Justice, with subsequent final approval from the Cabinet of Ministers of Ukraine.

Taking into consideration the high level of bureaucracy within the central state authorities of Ukraine, on one hand, as well as the constant staff rotation on the other, such procedure renders the concession mechanism nigh unimplementable in practice. This is the major reason why the concession scenario has not been used in port industry to this day.

In order to solve this issue, the Draft Law suggests simplifying the concession procedure and provides that, in order to be implemented, the concession project would need to be coordinated by three ministries (Infrastructure, Economy and Finance), while bringing the issue to the Cabinet of Ministers would only be required in exceptional cases (when it is necessary to coordinate the actions of different authorities involved in the implementation of the project, or to decide on selecting a concessionaire (private partner) without a contest (please see below).

Lease to Concession Transition

Current legislation states that the concessionaire can only be selected upon the results of a special contest procedure.

The Draft Law proposes several exceptions, which do not need a contest to be held, namely:

— in case of need to ensure national security and defense;

— in case the concessionaire is the owner of a unique know-how or copyright technology;

— the most interesting exceptions for businesses — in case of transition from lease to concession under the procedure, provided for by the Draft Law.

Let us dwell on the last basis for non-competitive concession in more detail.

Thus, the Draft Law proposes to introduce a potential opportunity for a company, which rents state-owned objects under a lease agreement and has intentions to implement an investment project on the basis of such objects, an opportunity to transform their relations with the state from lease into concession without holding a contest to select a concessionaire under the following terms:

— the lease agreement must be concluded before the Draft Law comes into force;

— the Lessee shall not allow any major violations of their obligations under the lease agreement while the agreement is valid;

— the term for the concession agreement shall not exceed the period remaining until the termination of the lease agreement;

— the non-competitive transition from lease to concession must be agreed upon by the Cabinet of Ministers of Ukraine.

This innovation, as proposed by the Draft Law, is progressive and will support the balance of interests between new investors and port operators, who have been operating port infrastructure objects for numerous years and who have invested significant funds into modernization thereof on the basis of lease agreements (having no other legal instruments to do so due to imperfections in concession legislation).

Introducing an Opportunity for State Enterprises

Another key issue of current legislation is the fact that nowadays only a central executive body, which administers relevant state assets that are the subject of concession (in case of port industry — the Ministry of Infrastructure of Ukraine), can act as a concessor (public partner) under a concession agreement.

Herewith, such executive bodies are but nominal owners of state property, while it is state enterprises (e.g., Ukrainian Sea Ports Administration) who actually operate, maintain and manage such property.

At the same time, current legislation does not allow the imposition on such state enterprises of any obligations within the framework of execution of a concession agreement (e.g., dredging works in a port, etc.).

Moreover, having no right to claim any part of the concession payments (since 100% of such payments are to be paid by the concessionaire to the state budget), the said balance-holders have no particular interest in a concession scenario. This leads to a conflict of interests between a particular state enterprise and the industry as a whole as well as stagnation of the concession procedure at the level of heads of state enterprises.

The Draft Law proposes an effective solution to this issue through introduction of an opportunity for state enterprises — balance sheet holders of state property to partake in concession agreements on the side of the concessor, which would allow both to assign direct obligations within the framework of concession agreements and to grant them respective rights (including the right to receive a part of the concession payments).

More Positive News for Business

The Draft Law provides for a series of other innovations that are positive and progressive for investors, particularly:

— partially simplified regulation of land and construction issues within the framework of implementation of concession projects (introducing a simplified procedure for the concessionaire to register the right to use the land plot necessary for a concession agreement, to obtain construction permits, etc.);

— a possibility to conclude a concession agreement not only for the winner of the concession contest but also for its subsidiary company;

— a right to transfer any disputes arising from the concession agreement to international commercial arbitration, chosen by the parties.

Points to Improve

Despite the fact that the Draft Law published by the Ministry of Economy has an overall positive orientation, we find some of its provisions still “raw” and in need of further improvement.

Firstly, we have in mind the norms regulating issues related to the possibility for the concessionaire to pledge their rights under the concession agreement in order to secure obligations under loan agreements, concluded by the concessionaire for the purpose of obtaining financing for project implementation (as well as issues related to seizure of such object of a pledge in case the concessionaire violates their obligations under the loan agreement). This issue is very important in order for a concession to function effectively in Ukraine, since the majority of concession projects are implemented through loaned capital.

Herewith, in addition to thorough development of the main text of the Draft Law, it is also important to make large-scale changes to other legislative acts, which are directly or indirectly related to concession activity, in order to bring the entire legislative base to a single logic and principles, and to also avoid any collisions between different laws, which would interfere with practical implementation of concession projects.

Conclusions

To sum up, we would like to note that prompt development, improvement and subsequent approval and implementation of the new Draft Law On Concessions is of paramount strategic importance for successful development of the port industry and the entire economy of Ukraine. This will significantly improve the investment climate in Ukraine and turn a new page for relations between investors and the state.

1 http://www.me.gov.ua/Documents/Detail?lang=uk-UA&id=b4cba3d2-99c0-4e7a-9b2f-78a7290779c5&title=ProektZakonuUkraini-proVnesenniaZminDoDeiakikhZakonodavchikhAktivUkrainiSchodoReguliuvanniaKontsesiinoiDiialnostiDliaZaluchenniaPrivatnogoSektoruDoRealizatsiiProektivNaUmovakhDerzhavnoprivatnogoPartnerstva-UTomuChisliKontsesii-ZMetoiuModernizatsiiInfrastrukturi