Will PPPs Build the Future of Ukraine?
Public-Private Partnerships (PPPs) are popular around the world for implementing infrastructure projects. The World Bank’s PPP Knowledge Lab defines a PPP as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance”.
Currently in Ukraine, interest to PPPs in infrastructure seems to be stronger than ever before. Such interest in cooperation between the public and private sectors is driven by limitations in public funding to cover infrastructure needs, as well as the urgency of improving the quality of Ukrainian infrastructure and service standards.
The PPP issue is increasingly on the political agenda as an efficient method of stimulating the economy. With the recently published tenders for two pilot port concession projects, the new Law On Concessions expected to come into force this year, and a good deal of fresh PPP plans announced by the government, an interesting turning point regarding PPP policy in Ukraine is approaching.
The Need for PPPs
However, will handing over infrastructure problems to private investors be a panacea for Ukraine?
Critical research says it depends. According to the World Bank working paper by Michael Klein, there is no evidence that PPPs are better run than public entities over the long term. Generally, he says, waves of enthusiasm for PPPs are followed by“some disenchantment and consolidation.”1
Another research paper suggests that PPPs work much better in middle-income economies than they do in low-income countries.2 This conclusion is consistent with the findings of the 2018 World Bank report called Procuring Infrastructure Public-Private Partnerships (World Bank Report 2018), according to which the lower the income level of a country, the lower the performance in the four assessed thematic areas: preparation, procurement, contract management, and management of PPPs.3
Ukraine is currently riding a wave of enthusiasm for PPPs. Nevertheless, while strong political support is essential for efficient implementation of PPPs, it is not sufficient. Ukrainian politicians widely cite the benefits of PPPs, including generating investment into the country’s economy, improved service quality, creation of new markets, etc.
Such benefits, however, do not result simply from increased private investment in infrastructure or the introduction of favourable legislation.
According to the Independent Evaluation Group (World Bank Group), PPPs only have the potential to deliver the goods if they are both designed and implemented well. Poorly structured PPPs, in contrast, “can quicklymaterialize high risks, and create many headaches for the public sector and private parties involved through a variety of unwelcome developments.”4
In order to make significant progress in developing PPPs and build national capacity to handle them, Ukraine needs to use not only ad hoc solutions, but introduce well-thought-out and long-term institutional and legislative changes. Otherwise, the risk of failure is considerable.
Current state of PPPs
Ukraine is one of the countries that has specific PPP legislation including the Law On Public-Private Partnership, several concession laws, and various subordinate pieces of legislation. According to the EBRD, the PPP Law, being the main (but not always primary) legislative act regulating PPPs in Ukraine “is ranked as highly compliant in terms of project preparation and selection”.5
It contains a clear definition of what constitutes a PPP, its features, types of PPPs, sectors of the economy in which PPPs are allowed, criteria for selection of private parties, etc. Pursuant to Article 5, section 1, of the PPP Law, PPPs may be formalized using the following types of agreements: (i) concession; (ii) property management; (iii) joint activities; (iii) other agreements.
The concession legislation ranked as non-compliant (low compliance) has been recently redrafted and is still expected to come into force this year.
Nevertheless, PPPs are undoubtedly more complicated than traditional procurement tools. For them to be workable, the adoption of enabling laws and regulations is not sufficient.
According to the data of state and local authorities in Ukraine, as of 1 July 2019, 186 PPP contracts were concluded, of which only 52 are being currently implemented.6
The others contracts have been either not implemented (113), terminated (17) or expired (4). There are multiple reasons for these unfortunate statistics, including inefficient management of projects, lack of competitive procurement, inappropriate sharing of risks, lack of commitment from both state and private partner, outdated and non-consistent legislation, etc.
Until now, however, some PPP projects have been implemented in Ukraine quite efficiently. Many of them were developed and launched with the support of various international organizations. Among these are the establishment of a biofuel heating project in the city of Malyn, Zhytomyr Region (with the support of the USAID-funded PPP Development Program), the Oster project aimed at rebuilding central heating systems, and several PPPs in Yuzhny port (including dredging works around the new berth of the company MV Cargo co-financed by the EBRD and EIB). It goes without saying that all of the above projects only broadly qualify as PPPs. They would be more accurately defined as examples of cooperation between the state and a private partner in the infrastructure area. Unfortunately, the well-established assessment that “there are no successful long-term PPP projects in Ukraine so far” is probably true.
In Ukraine, it is very difficult to evaluate the state of implementation and overall effectiveness of PPP projects based on available data, since it is mostly confidential or missing.
Recent decisions and reforms
Ukraine recently undertook several reforms affecting its PPP regulatory framework.
This was done inter alia in anticipation of the launch of two pilot port concession projects (Olvia and Kherson), the tendering for which is expected to commence in October 2019.7
For instance, the government has established the PPP Support Agency, which is supposed to deal with the preparation of PPP projects. It’s been announced that the agency will begin its work by the end of 2019. The legal basis for establishing this agency was provided by the Government’s Priority Action Plan for 2018, approved by Resolution of the Cabinet of Ministers of Ukraine No. 244-p of 28 March 2018. The efficient functioning of the newly-founded PPP Support Agency will depend on the extent of its powers, independence, and availability of funds. The PPP is supposed to get budgetary money from the Ministry of Economic Development and report their use on a quarterly basis. It will hopefully be well-equipped and well-organized to manage, monitor and control PPP projects of any scale.
PPPs are currently managed by the PPP division at the Department of Investment at the Ministry of Economic Development.
Ukrainian officials consistently announce various plans with regard to the launch of pilot PPPs in other sectors. For instance, according to the media, PPPs are supposed to be launched in relation to Mykolaiv and Zhmerynka railway stations (pilot projects are being prepared with the support of international financial institutions). Similar plans are also reportedly in place for Khmelnytsky railway station, various roads (Lviv-Krakovets, Bila Tserkva-Kyiv, roads around Kyiv and Odesa), some regional airports (e.g. Lviv Airport), etc. A tender announcement was recently published to reconstruct the existing cargo terminal and build a new cargo terminal at Boryspil Airport.
Furthermore, on 3 October 2019, a new Draft Law On Concessions, replacing the old one with the same name, was approved and adopted by the Ukrainian Parliament. The new concession law (with amendments) is expected to come into force later this year as the launch of many PPP projects (including Olvia and Kherson ports) depends heavily on this update. The law intends to modernize the concession mechanism, harmonize existing concession laws of Ukraine (e.g. by covering the peculiarities of road concession)8, and bring them into line with European legislation. The new concession law also provides for amendments to other legislative acts, including the PPP Law.
Nevertheless, as mentioned earlier, PPPs require certain favourable conditions that cannot be created by merely adopting new legislation or establishing special PPP units.
According to a 2018 World Bank report, good practices to ensure successful implementation and delivery of PPP projects include:
— Availability of management systems for implementation of PPP;
— Availability of a system for tracking progress and completing construction works under a PPP contract with relevant information made publicly available;
— Availability of monitoring and evaluation systems to oversee implementation of PPP;
— Express regulation of certain key issues in legislation and/or PPP contracts, including modification and renegotiation of the contract, potential changes in the structure of the private investor, dispute resolution mechanism, grounds for termination of a contract, etc.
Ideally, all this has to be implemented in Ukraine before PPP contracts are actually signed.
At present there are no clear requirements in legislation as to the mechanism and procedure by which state authorities are to monitoring the implementation of a PPP project. Article 21 of the PPP Law states that control over the implementation of contracts concluded under public-private partnership shall be executed by the central executive body authorized by the Cabinet of Ministers of Ukraine, other state and self-government bodies and their officials in accordance with their powers in the manner prescribed by law.
Private partners shall provide the relevant information on the execution of contracts concluded under the PPP to public partners in the manner and in accordance with the form approved by the Cabinet of Ministers of Ukraine. The CMU Regulation On Approval of the Procedure of Provision of the Information by Private Partner to State Partner on Realization of the PPP Contract of 9 February 2011 No. 81 provides for the obligation of private partners to regularly forward contract performance information to the public partner and the timelines for providing such information. However, the only aspect of a PPP contract’s performance that is usually monitored by state partners is financial (profitability of PPP object), while such criteria as quality of goods, works or services provided is usually not subject to control.
Additionally, for successful implementation of PPP projects, it is essential to have an integrated country vision on infrastructure needs. Such a vision is currently required in Ukraine. It shall demonstrate the strong commitment of state partners and keep private investors interested in financing Ukrainian infrastructure.
Unfortunately, Ukrainian decision-makers and public authorities are currently opting for short-term orientation in this regard. On 30 May 2018, the Cabinet of Ministers of Ukraine approved the National Transport Strategy of Ukraine until the year 2030 titled Drive Ukraine 2030, which addresses the need to improve the PPP legislative framework and mechanism. However, apart from this general paper, Ukraine does not have a comprehensive system for selecting priority PPP projects in the long-term perspective at either state or local levels.
As a final remark, we’d like to note that MDBs and other international organizations currently play important roles in supporting the development of PPPs in Ukraine. The EBRD and IFC provided advisory support to the Ukrainian government for feasibility studies and the preparation of tender documentation. USAID funds the Public Private Partnership Development Program in Ukraine. The World Bank supports PPP training for Ukrainian public officials.
While these organizations play a vital role as catalysts for PPP reform in Ukraine, we hope that in future Ukraine will build its own national capacity to have all the skills and resources necessary to prepare and implement PPP projects on its own. In this case, PPPs will provide real benefits for the Ukrainian infrastructure, economy and social development, and will ensure value for money for state budget funds spent.
Volodymyr Yaremko is a counsel at Sayenko Kharenko
Vladlena Lavrushyna is an associate at Sayenko Kharenko
1 Klein M. 2015. “Public-Private Partnerships: Promise and Hype.” Policy Research Working Paper No. 7340, World Bank, Washington, DC.
2 Leigland J. 2018. "Public-Private Partnerships in Developing Countries: The Emerging Evidence-based Critique", The World Bank Research Observer, Volume 33, Issue 1, February 2018, Pages 103–134
3 World Bank. 2018. Procuring Infrastructure Public-Private Partnerships Report .
4 Apfalter S. and Martinez J. 2018. "Creating Markets: Are PPPs the Answer". Available at https://ieg.worldbank.org/blog/creating-markets-are-ppps-answer
5 EBRD review (2017/2018) is available at https://ppp-ebrd.com/review.php?country=Ukraine.
6 The most visible form of PPPs in Ukraine is concession, since 35 out of 52 implemented PPP agreements are concession agreements. The others are 15 joint venture agreements and 2 other agreements. PPPs have been deployed for a range of public sector infrastructure and service delivery, including collection, purification and drainage of water (18 projects), production and transportation of natural gas (12 sector) and infrastructure (7 projects).
7 Official tender announcements were published in the official government newspaper “Uriadovyi Kurier”. The deadline for submitting applications will be 60 days following the publication of the same tender announcements in another newspaper, “Holos Ukrainy”.