The public discussion around the critical need to invest in Ukraine’s infrastructure was especially vibrant last year. According to various estimates, its modernization requires the spending of at least USD 30 billion by 2030. Moreover, delivering these projects on time is critical if Ukraine wants to fulfill its logistics potential.
The Government’s ambitious plans are justified as infrastructure investment causes a “multiplier effect” throughout the national economy. We asked Oleksandr Kurdydyk, partner, head of finance, projects and restructuring, and Kateryna Soroka, of counsel, DLA Piper Ukraine, how the sector attracts investors and what their requirements towards comfortable regulation are.
The Ukrainian Government has announced a plan to modernize the transport infrastructure by allocating funds from the state budget and attracting investments. What has been done to pursue this strategy?
Oleksandr Kurdydyk: Taking into consideration the European vector chosen by Ukraine, the Ukrainian Government declares its intentions to implement the success story of European countries in the field of public-private partnership (PPP). In order to implement those ambitious plans the Government established the Project Office on PPP, working closely with international investors and lobbying the relevant legislative improvements.
Although it is too early to talk of big success stories for the Ministry of Infrastructure of Ukraine related to PPP projects, some steps have already been taken in the right direction.
The most important recent development in Ukrainian legislation is the new draft law On Concessions, which was prepared with the involvement of international consultants. The new draft law was prepared to replace outdated and scarce laws on concessions. The new law will introduce appropriate allocation of risks between public and private partners, simplify the tender procedure, provide the right for financing institutions to change the project company (step-in right) and envisage the possibility of direct agreements. The new law will also fill in gaps in legislation in respect of land plot allocation issues and unify the rules for all types of concession project (such as roads concession or concession in the area of public services).
In the absence of special legislation, what existing legal mechanisms are being used by investors in their current projects in Ukraine?
Kateryna Soroka: Since the adoption of the new law on concessions is still in progress, suggestions are being put to investors that they start investment projects based on the lease of state property.
Although the lease mechanism is simple and well-tested in practice, it has a number of drawbacks. In particular, a lease agreement would not provide for a correlation between rent payments and the investor’s results of commercial activities. Therefore, for existing investors not satisfied with their lease agreements, the new Draft Law envisages the procedure of turning the lease into concession. Unfortunately, that transformation is not going to be automatic and would require the cooperation of various authorities, which may potentially block the process at any stage.
You’ve mentioned the instruments which are new for the Ukrainian market. How can they work in practice?
O. K.: The results of implementation of the new draft law will be tested in the field. The Government is currently developing three pilot projects in Ukrainian ports. In particular, the concession mechanism is planned for introduction in the Stevedoring Company Olvia (Dnipro-Bug estuary), Commercial Sea Port of Kherson and the Ferry Terminal in the Commercial Sea Port of Chornomorsk. The Ukrainian Government anticipates they could attract USD 300 million as investments in the port infrastructure through modernization of existing facilities, as well as through development of new assets (e.g. there is a plan to build a grain terminal and oil-extraction factory on the territory of Stevedoring Company Olvia). The preparation and implementation of the above projects is supported by the International Finance Corporation and European Bank for Reconstruction and Development.
Almost every reform in our country faces the challenge of overcoming red tape. Do you anticipate bureaucratic constraints in attracting investment to the port infrastructure?
K. S.: The bureaucracy in Ukraine is the major obstacle for all positive changes introduced by Parliament or the Government. Complex institutional transformation and changes could mitigate the negative impact of Ukrainian bureaucracy.
In the sphere of infrastructure some work has been already done in this regard.
For example, 2018 began with establishment of the Maritime Administration under the Cabinet of Ministers of Ukraine (CMU). This new agency is expected to perform the function of head office in the maritime field and to coordinate the work of Ukrainian sea ports, ensure the safety of maritime navigation and perform international cooperation. Prior to that, the Ukrainian Sea Port Authority was set up in order to manage strategic infrastructural objects and facilities in sea ports.
What are the main risks that investors face in practice? How could investors’ rights be secured?
O. K.: According to our practice, except for bureaucratic obstacles, the main risks for investors are associated with gaps in legislation or vague wording in legal provisions and inconsistent or sometimes corrupt court practice. The legislative gaps and unclear provisions lead in practice to diversified interpretation of the same provision of law by different state authorities or even by the same authority. The above risk can be mitigated by significant legislative work or by consistent and stable court practice. While legislative work is time-consuming, the infection of the court system with corruption and unqualified staff does not resolve the problem either, but rather creates an additional one.
As of now Ukraine has done significant work to change the situation in legislation and to build a court system that can be trusted. There is still a great deal of work to be done, but positive changes can already be noticed in the work of the newly- elected Supreme Court of Ukraine.
In order to secure their risks, major investors are currently signing memorandums of understanding with the Ukrainian Government or using similar instruments existing in English law. Although the enforcement of such documents is questionable in Ukrainian reality, they definitely set out certain obligations of the state party and provide some comfort for investors.
Building infrastructure is a long-term project that requires significant financing. Do you think international lenders will be keen to lend money on favorable terms for this purpose?
O. K.: From year to year Ukraine becomes more and more attractive for different types of international lenders. However, the receipt of significant international funding on favorable terms requires additional security and guarantees not only from the borrower, but also from the state party. One of the mechanisms, which can create a supportive environment for international lenders is a direct agreement executed by the state party and lenders.
Although Ukrainian legislation does not prohibit the conclusion of a direct agreement, state authorities would not like to and, in most cases, refuse to sign that agreement and undertake additional obligations, even if it includes mostly informational covenants.
The new draft law on concessions introduces the mechanism of direct agreement in the sphere of concession, which, among other things, may envisage the right of lenders to change the project company. We believe that if such instrument is supported by legislators and introduced in Ukrainian practice, it will be a great step forward, which would enable a project financed by international lenders to be raised to a whole new level.
The Ukrainian Ministry of Infrastructure has stated that the cost of logistics in Ukraine is around 40% higher than in Europe, as the railroad is cheap, but ports are expensive. Do you foresee the appearance of any incentives in the near future?
K. S.: Government officials announce plans to build the new “Silk Road”, which starts in Ukrainian ports and goes through Georgian ports, Baku and Kazakhstan to China. With those plans comes the understanding that port duties in Ukrainian ports should be competitive. Therefore, starting from 1 January 2018 the CMU reduced port duties by 20%. However, even after such a reduction the amount of all types of port duties to be paid is very high compared to other ports in the Black Sea region.
Nonetheless, the Ukrainian Government is not going to stop at the mentioned recent developments related to sea ports. There are a lot of projects in other infrastructure sectors. For example, the design of construction of the first toll road in Ukraine is being developed by the Ukrainian authorities. At the end of February, the Ukrainian Parliament approved changes to legislation, which simplify the procedure of concession in the sphere of roads.
It was recently mentioned in public sources that investment in roads would reach USD 2-5 billion in coming years. Should the volume of investment increase to those numbers, investors would require more developed instruments to secure their rights and legislators would be expected to adopt further improvements to the law.
Although the above tasks are challenging for the Ukrainian Government, the Ministry of Infrastructure of Ukraine would like to implement a very ambitious project, namely, construction of 5 out of 11 global Hyperloop routes which would pass through the territory of Ukraine. Volodymyr Omelyan, the Minister of Infrastructure of Ukraine, has announced that Ukraine would like to implement innovations into logistics sphere, upgrade transport corridors and intermodal transport, as well as enhance digitalization of transport. If Mr. Omelyan’s ambitious plans do materialize, then more new legislation may be introduced to govern the infrastructure sphere.
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