COVER STORY DLA PIPER UKRAINE

Changing Fortunes

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.

UJBL The Ukrainian Government has pared with the involvement of interna- ects based on the lease of state property. announced a plan to modernize the trans- tional consultants. The new draft law was Although the lease mechanism is simple port infrastructure by allocating funds prepared to replace outdated and scarce and well-tested in practice, it has a num- from the state budget and attracting in- laws on concessions. The new law will ber of drawbacks. In particular, a lease vestments. What has been done to pursue introduce appropriate allocation of risks agreement would not provide for a cor- this strategy? between public and private partners, sim- relation between rent payments and the Oleksandr Kurdydyk: Taking into consid- plify the tender procedure, provide the investor’s results of commercial activities. eration the European vector chosen by right for financing institutions to change Therefore, for existing investors not satis- Ukraine, the Ukrainian Government de- the project company (step-in right) and fied with their lease agreements, the new clares its intentions to implement the suc- envisage the possibility of direct agree- Draft Law envisages the procedure of turn- cess story of European countries in the ments. The new law will also fill in gaps in ing the lease into concession. Unfortu- field of public-private partnership (PPP). legislation in respect of land plot alloca- nately, that transformation is not going to In order to implement those ambitious tion issues and unify the rules for all types be automatic and would require the coop- plans the Government established the of concession project (such as roads con- eration of various authorities, which may Project Office on PPP, working closely with cession or concession in the area of public potentially block the process at any stage. international investors and lobbying the services). relevant legislative improvements. UJBL You’ve mentioned the instru- Although it is too early to talk of big UJBL In the absence of special legisla- ments which are new for the Ukrainian success stories for the Ministry of Infra- tion, what existing legal mechanisms are market. How can they work in practice? structure of Ukraine related to PPP proj- being used by investors in their current O. K.: The results of implementation of the ects, some steps have already been taken projects in Ukraine? new draft law will be tested in the field. in the right direction. Kateryna Soroka: Since the adoption The Government is currently developing The most important recent develop- of the new law on concessions is still in three pilot projects in Ukrainian ports. ment in Ukrainian legislation is the new progress, suggestions are being put to In particular, the concession mechanism draft law On Concessions, which was pre- investors that they start investment proj- is planned for introduction in the Steve- Matters. of this text was published in the March issue CEE Legal Part

26 June 2018 | The Ukrainian Journal of Business Law | www.ujbl.info DLA PIPER UKRAINE

DLA Piper Ukraine

Year of establishment: 2005 Number of lawyers/partners: 40+/7 CORE PRACTICE AREAS Antitrust and Competition Corporate and M&A Employment & Benefits Finance, Projects and Restructuring Litigation & Regulatory Real Estate Tax

www.ujbl.info | The Ukrainian Journal of Business Law | June 2018 27 COVER STORY DLA PIPER UKRAINE

introduced by Parliament or the Govern- ment. Complex institutional transfor- mation 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 establish- ment 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 Ukrai- nian sea ports, ensure the safety of mari- time 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. UJBL What are the main risks that in- vestors face in practice? How could inves- tors’ 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 pro- visions and inconsistent or sometimes corrupt court practice. The legislative gaps and unclear provisions lead in practice to diversified interpretation of the same pro- vision of law by different state authorities or even by the same authority. The above risk can be mitigated by significant legisla- tive work or by consistent and stable court practice. While legislative work is time- consuming, the infection of the court sys- tem with corruption and unqualified staff The most important recent does not resolve the problem either, but rather creates an additional one. development in Ukrainian As of now Ukraine has done significant work to change the situation in legislation legislation is the new draft law and to build a court system that can be On Concessions, which was trusted. There is still a great deal of work to be done, but positive changes can al- prepared with the involvement of ready be noticed in the work of the newly- elected Supreme Court of Ukraine. international consultants In order to secure their risks, major investors are currently signing memoran- dums of understanding with the Ukrainian doring Company Olvia (Dnipro-Bug estu- and implementation of the above projects Government or using similar instruments ary), Commercial Sea Port of Kherson and is supported by the International Finance existing in English law. Although the en- the Ferry Terminal in the Commercial Sea Corporation and European Bank for Re- forcement of such documents is question- Port of Chornomorsk. The Ukrainian Gov- construction and Development. able in Ukrainian reality, they definitely set ernment anticipates they could attract out certain obligations of the state party UJBL USD 300 million as investments in the Almost every reform in our coun- and provide some comfort for investors. port infrastructure through modernization try faces the challenge of overcoming red UJBL of existing facilities, as well as through tape. Do you anticipate bureaucratic con- Building infrastructure is a long- development of new assets (e.g. there is straints in attracting investment to the term project that requires significant fi- a plan to build a grain terminal and oil- port infrastructure? nancing. Do you think international lend- extraction factory on the territory of Ste- K. S.: The bureaucracy in Ukraine is the ers will be keen to lend money on favor- vedoring Company Olvia). The preparation major obstacle for all positive changes able terms for this purpose?

28 June 2018 | The Ukrainian Journal of Business Law | www.ujbl.info DLA PIPER UKRAINE COVER STORY

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 ad- ditional 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 in- ternational 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 in- formational covenants. The new draft law on concessions in- troduces the mechanism of direct agree- ment 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 instru- ment is supported by legislators and in- troduced 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. UJBL The Ukrainian Ministry of Infra- structure has stated that the cost of logis- tics 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 One of the mechanisms, which can in Ukrainian ports and goes through Geor- create a supportive environment gian ports, Baku and Kazakhstan to China. With those plans comes the understand- for international lenders is a direct ing that port duties in Ukrainian ports should be competitive. Therefore, starting agreement executed by the state from 1 January 2018 the CMU reduced port party and lenders 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. It was recently mentioned in public 11 global Hyperloop routes which would Nonetheless, the Ukrainian Govern- sources that investment in roads would pass through the territory of Ukraine. ment is not going to stop at the men- reach USD 2-5 billion in coming years. Volodymyr Omelyan, the Minister of Infra- tioned recent developments related to Should the volume of investment increase structure of Ukraine, has announced that sea ports. There are a lot of projects in to those numbers, investors would require Ukraine would like to implement innova- other infrastructure sectors. For example, more developed instruments to secure their tions into logistics sphere, upgrade trans- the design of construction of the first rights and legislators would be expected to port corridors and intermodal transport, toll road in Ukraine is being developed adopt further improvements to the law. as well as enhance digitalization of trans- by the Ukrainian authorities. At the end Although the above tasks are chal- port. If Mr. Omelyan’s ambitious plans do of February, the Ukrainian Parliament ap- lenging for the Ukrainian Government, materialize, then more new legislation proved changes to legislation, which sim- the Ministry of Infrastructure of Ukraine may be introduced to govern the infra- plify the procedure of concession in the would like to implement a very ambitious structure sphere. sphere of roads. project, namely, construction of 5 out of END

www.ujbl.info | The Ukrainian Journal of Business Law | June 2018 29