Effective use of existing resources is a mandatory feature of every individual so is for the whole countries. Ukrainian Parliament adopted a new Concession Law (the “Law”) which essence will be legally binding starting from 1 February 2020 (with a grace period for some provisions).
Entering into force of the new Law will replace an outdated bill adopted back in 1999. According to the motivation letter circulated by the authors of the Law – the concession law badly needed a renew to match modern international practices.
The Law in its essence must attract substantial private finance at modernization and effectively increase the use of roads (motorways), sea and river ports as well as other pieces of infrastructure in state domain. Further in this announce we briefly explain the main instruments the Law offers to potential concessionaires.
What is concession?
The Law suggests the definition of the concession as the form of state and private partnership. The partnership is envisage as granting to a concessionaire one or several rights of:
- construction or development (new construction, reconstruction, restoration, capital renew or modernization) of particular piece or infrastructure;
- management (use, exploitation, maintenance) of a piece of infrastructure; and/or
- supply public services in accordance with relevant concession agreement.
The concession sets forth operational risks be on the side of the concessionaire, including the risks of market demand or supply.
Thus, the government may transfer into concession any state-owned pieces of infrastructure (like roads, airports, transport stations, ports) or certain rights aiming at development of particular projects of public importance. Generally, according to concession agreements, concessionaires will be required to pay the state or vice versa, the state compensate the concessionaires. The Law appears to be rather flexible on terms of the concession agreements.
It must be noted the Law does not allow concessions of projects:
- exempted private investments;
- requiring (by law) of full repayment of the investment by local or state budgets;
- which do not envisage
- development and/or construction (new construction, reconstruction, restoration, capital repair or technical conversion); and/or
- management (use, exploitation, technical maintenance) of particular infrastructure; and/or
- rendering of publicly important services; and/or
- which, instead, require exploring of fields and mining of natural resource.
At the same time, the Law introduces clear regulation of the property rights to the concession. In particular, the Law sets for protection of the state (or municipal) ownership to the concession.
Sample concession of a motorway
In our example we will use a private company which initiates the construction of a new highspeed motorway. According to the Law, a concessionaire may initiate conclusion of the Concession Agreement on construction and further exploitation of a highspeed motorway. The construction shall include project development and the construction works. It must be noted that the construction works include construction of a new roads (motorways) as well as reconstruction or capital repair (or modernizing) of existing roads. At the same time, financing of the project may be either split between the concessionaire and the authorities or born by the concessionaire unanimously.
At the end of the day, local authorities will own a motorway whilst the concessionaire will (or may) own pieces of infrastructure like fuel stations, garages or restaurants along the road. In addition, the concessionaire mat be allowed to charge toll fare at rates limited by special regulations. The above win-win plot means improvement of road infrastructure for the state whilst the concessionaire will be able to return its investment via exploitation of the new pieces of real estate.
Terms (period) of concessions
The term for each concession will be defined individually based on:
- period of exploitation of the project considering its normal wear and tear;
- arguably supported period of investment return (considering interests on loan financing) and receive of agreed profits;
- period required for achievement of the concession targets and tasks, including tasks related to its public importance.
At the same time, concession agreements must be signed for the period not less than five years and not exceeding 50 years. Minimum term for the concession agreements on construction of motorways is set to 10 years or above.
State support of concessions
The Law provides for measures for attraction and support of concessions. In particular, the state support is available for concessionaires via:
- compensation upon commissioning;
- purchase of particular volume of goods or services as agreed under relevant concession agreement;
- supply of particular volume of goods or services as agreed under relevant concession agreement;
- development (at the expense of state or municipal budgets) of additional infrastructure, thus, ensuring sufficient capacity of electric, gas, water or heat supply.
At the same time, the state support provided under any concession agreement shall not cover more than 50% of operational risks related to market supply and demand and the support may not be in excess of the concessionaires’ expense. Relevant tender documentation will cover the matters of state support for each particular concession.
The Law also provides for the following:
- introduces transparent tender procedure for appointment of concessionaires (concession tender, competition dialogue);
- provision on engagement of advisors and independent experts for development of concession provisions and state-private partnerships in the form of concession;
- guarantees for the concessionaires and creditors;
- peculiarities of concession in natural monopolies;
- land allotment for the construction needs;
- competence of international commercial arbitration or investment arbitration; and
- introduction of audit and monitoring of concession projects, etc.
Today, there is a few histories of successful concessions projects in Ukraine. This is an evidence of not effective partnership between the state and the private business. Therefore, we have high expectations of concession projects due to the new Law.