Last month, at the UK 2021 Climate Change Conference (COP26), the world was engaged in approving an urgent global action plan to limit global warming to 1.5°C. During the conference Ukraine, among other 151 countries, submitted a new climate plan (known as nationally determined contributions, or NDCs) to cut its emissions by 2030. Having pledged to ensure an economy-wide net domestic reduction of 65% in GHG emissions compared to 1990, Ukraine now needs to proceed. Among the steps to be taken in many of the areas to reach this goal, one is addressing the waste management problem the country faces. Although probably not the first issue to come to mind, burning waste and storing it in landfills is a significant source of climate emissions and health risks. According to studies, however, a circular economy relying on efficient waste management, including waste recycling maximising the use of resources, could reduce greenhouse gas emissions by 39%. Thus, waste management is a cost-effective way for the country not only to move from waste to resources, but also an important contribution to its decarbonisation undertakings towards the planet. Putting efficient waste management in place is a true challenge for Ukraine, which though offers many opportunities for investors. In turn, Ukraine makes significant efforts to create proper incentives for investors to come. Read more on these in this article by our experts Kateryna Chechulina and Ivan Pshyk.
With the adoption of the National Waste Strategy, the National Waste Management Plan, and passing the draft law “On Waste Management” No. 2207-1-д at its first parliamentary reading (the “Draft Law”), Ukraine is embarking on its journey to develop efficient waste management market and a sustainable economy.
These regulations aim to: (i) allow new players to enter the market; (ii) change the mode of cooperation between the market participants and introduce an intermediary operator; (iii) introduce an “extended producer responsibility” concept; and (iv) ensure a transparent business environment and economic incentives for potential investors.
The reform is being driven not only by the global sustainability movement, but very much by the desperate state of waste management in Ukraine: only 6.3% of all municipal solid waste produced in Ukraine in 2020 was recycled, while the rest disposed of in the landfills. Pursuant to the National Waste Strategy, underpinned by the undertakings under the EU Association Agreement, Ukraine has committed to reduce the landfills disposal rate to 35% by 2030. However, such an ambitious goal is simply impossible without the necessary infrastructure. Currently not a single waste management plant is functioning in Ukraine (although a few projects are underway, they are progressing too slowly).
Such situation requires not only dedicated legal rule-making, but also significant funding that is expected mainly from the private sector and foreign investors. The Draft Law marks the start of this work and proposes various incentives for investors to come to Ukraine.
Circular economy: the cornerstone of the reform
The reform’s entire architecture is underpinned by the waste management hierarchy concept for the circular economy: this is crucial to prevent the generation of solid waste and ensure its reuse and recycling before any disposal. This is based on the fundamental principles of the EU regulations: (i) effective municipal waste management system; (ii) the extended producer responsibility concept; (iii) transparent information and monitoring systems; and (iv) economic incentives for commercial viability of the activities in the sector.
New municipal waste management system
An effective municipal waste management system is a crucial component of the reform and the one that is currently in place cannot be considered as such. As of now, customers enter into contractual arrangements directly with contractors providing waste transportation services. These contractors, however, are also responsible for many unusual functions such as coordinating all other participants, payment settlements and redistribution of fees collected from customers (including to the waste recycling and disposal sites). However, current legislation as well as the enforcement framework cannot ensure that these contractors duly perform their fundamental obligations, including transporting the collected waste to legal disposal sites and recycling plants (and not to illegal uncontrolled landfills), ensuring a stable supply of waste in the agreed volumes to the waste recycling plants and disposal sites, and fully and timely redistributing fees from customers. This situation poses unacceptable commercial risks to the waste recycling and disposal industry and for potential investors in this sector.
Consequently, the Draft Law introduces a conceptually new structure of the municipal waste management system shown in the chart below.
The main players in the local waste management system, as shown on the chart, are:
- municipality: it is the key authority in the waste management sector, it appoints a local waste management operator (mandatory in local communities with a population over 150,000, and discretionary in others) (the “Operator”) and contractors providing waste collection, transportation, recycling and disposal services;
- the Operator: a communal enterprise appointed by a local council with a central role in the local waste management system, which: (i) enters into service agreements with consumers and contractors; (ii) acts as a settlement centre; (iii) provides customer support; and (iv) controls the quality of the provided services; and
- contractors: business entities appointed by a local council providing waste collection, transportation, recycling, and disposal services to the customers.
It is expected that such composition of market players will ensure healthy competition between providers of waste management services (contractors) and thus increase the quality of the services they deliver.
To ensure that such system and processes are fully transparent, accountable and digitalised, the Draft Law envisages the implementation of an integrated information system for reporting, communication and interaction between the authorities and the market participants.
Introduction of extended producer responsibility
Another fundamental element provided by the Draft Law for a balanced waste management system is extended producer responsibility (EPR). EPR envisages that producers are responsible for managing the waste accumulated from consumption and the use of certain types of manufactured goods: packaged products, electrical and electronic equipment, batteries and accumulators, decommissioned vehicles, lubricants (oils), tires, textiles, etc.
EPR exists in parallel with the municipal waste management system. This means that producers are responsible for managing certain types of waste, including organising waste collection and separation sites, and hiring and paying contractors for waste recycling and disposal, while all other municipal solid waste is processed in the municipal waste management system as described above.
Under the Draft Law it is now the producers who are financially responsible for managing the relevant types of waste. Accordingly, customers are expected to be free of a financial burden to cover the relevant expenses as part of waste tariffs.
Incentives for investors
While all of the above lays down the critical regulatory basis, the implementation of the reform in practice will not be possible without having the necessary physical infrastructure. Currently, not a single waste management plant is functioning in Ukraine. Waste management reform requires a huge amount of funding to create new and modernise the existing infrastructure (unofficial sources project between EUR 4bn to EUR 10bn, depending on the scale and targets of the reform). With no or little financial capacity, municipalities will not be able to implement any significant infrastructure projects or meet the reform’s objectives in the foreseeable future. This presents unlimited opportunities for the private sector to step in and take part in the financing, construction, and modernisation of the relevant infrastructure. In this regard, the Draft Law provides a set of economic incentives in the waste management sector to encourage investors to take part.
Taxation incentives include: (i) setting landfill disposal tax rates depending on the type of waste and landfills; (ii) providing tax benefits (exemption from taxation or reduced rate/taxable base) to encourage recycling and waste donation; (iii) increased taxation of goods that have a significant negative environmental impact. It is also widely accepted that the waste disposal tax should be sufficiently high to make recycling and waste treatment (including incineration) operations commercially viable.
Waste supply and adequate tariff guarantees
The commercial viability of waste recycling and treatment facilities (including landfills) largely depends on a stable waste supply and adequate payment for the services. Currently, Ukrainians’ payments for a waste management service only includes waste collecting and burial components. The Draft Law changes this so that the tariff will now also cover recycling/re-use and waste management expenses required to ensure a proper quality of services. The tariff will vary for different types of waste, but in any case the Draft Law prohibits setting the tariff below an economically substantiated level. In addition, the Draft Law expressly obliges municipalities (if they act as initiators of the relevant investment projects) to guarantee a stable waste supply and set a tariff that will ensure a full return of the investment throughout the agreed period. If the municipality fails to do so, it will be obliged to reimburse the investor.
The Draft Law expressly mentions the possibility of PPP projects in the waste management sector, including in designing, construction, reconstruction and maintenance of municipal waste management facilities (the waste collection and transportation sectors are excluded from the PPP framework). Such partnerships would be implemented under general PPP principles provided in the PPP and concession legislation. This follows the world and European practice that has proven to be a beneficial solution from all stakeholders’ perspective. A great example of the potential of a PPP formula is the recent waste-to-energy PPP project in neighbouring Poland, valued at EUR 176.5m net, in which CMS lawyers advised a consortium of Polish and foreign institutions financing the project.
Next steps: adopting the Draft Law and issuing a call for investors
Currently, the Draft Law is awaiting its second reading in parliament. In parallel, many sectoral legislation acts are under preparation, including regarding packaging, electronic waste, decommissioned vehicles, industrial waste, waste disposal and incineration. While in the absence of up-to-date legislation in place, several projects are already underway (e.g. Lviv and Khmelnytskyi municipal solid waste projects). These were launched following serious incidents in the regions and are financed by the EU because of the critical need to resolve waste management problems delaying which may have dramatic consequences. The adoption of the Draft Law, however, is the first step and should be an absolute must for a fully operational waste management market in Ukraine which will take the country forward on the way to a circular economy and decarbonisation and become a clear sign for investors to come to Ukraine.