Legal Report
Construction and Operation of Kyiv City Ring Road from Stolychne shose Str. to M-03 Kyiv – Kharkiv – Dovzhanskyi motor road in the Kyiv–Boryspil section on the terms of public-private partnership and concession
August 12, 2014
This research was made possible with the generous support of the American people through the United States Agency for International Development (USAID)
The Author’s views expressed in this publication do not necessarily reflect the views of the USAID or the United States Government
Public Private Partnership Development Program - P3DP 42- 44 Shovkovychna Street, Office 11-D Kyiv 01601 Ukraine Telephone/Fax: +38 044 234 3525 www.ppp-ukraine.org
TABLE OF CONTENTS
1. INTRODUCTION ...... 2 1.1. Subject Matter of Analysis ...... 2 1.2. Assumptions ...... 3 1.3. Limitations and Qualifications...... 3 2. LEGAL ANALYSIS OF THE LEGISLATION IN THE AREA OF ROAD CONSTRUCTION ON THE TERMS OF PPP ...... 4 2.1. Major laws and subordinate legislative instruments on public procurement and concessions ...... 4 2.2. Current Tax Laws...... 6 2.3. Registration and Protection of Investments ...... 6 2.4. Legislation on Investments, Construction, and Commissioning ...... 7 2.5. Ukrainian Environmental Law...... 9 2.6. Special Regulations on Kyiv City Ring Road ...... 9 3. KEY STAGES OF THE ROAD CONSTRUCTION PROJECT: LEGAL DESCRIPTION ...... 10 4. SCENARIOS FOR IMPLEMENTATION OF THE ROAD CONSTRUCTION PROJECT: GENERAL DESCRIPTION ...... 11 4.1. Public Procurement ...... 11 4.2. Project Financing ...... 12 4.3. Concessions as a Type of PPP ...... 13 5. CONSTRUCTION AND OPERATION OF ROADS ON THE TERMS OF CONCESSION ...... 15 5.1. General description of concession for construction and operation of motor roads. Key legal premises for concession for construction and service of Kyiv City Ring Road ...... 15 5.2. Selection and Engagement of a Concessionaire: Procedural Issues ...... 16 5.3. Funding of a Concession Project: Legal Aspects ...... 18 5.4. Project Agreement ...... 23 5.5. Land Issues ...... 30 5.6. Permits and Licensing Procedures for Building a Motor road ...... 38 5.7. Road construction in concession projects ...... 40 5.8. The operation of the motor road concession projects...... 41 5.9. Concessionaire’s return of investment ...... 42 5.10. Early termination of the project (concession) contract ...... 45 5 .11. Dispute Resolution ...... 46 5.12. Amending the Legislation. Miscellaneous ...... 47 6. LEGAL BARRIERS THAT REQUIRE CHANGES IN LEGISLATION ...... 49 7. RECOMMENDATIONS ON THE MOST RATIONAL WAYS TO REDUCE THE POSSIBLE LEGAL RISKS ...... 70
1. INTRODUCTION
In this legal report (hereinafter the “Report”), we offer your our intermediate conclusions made based on the results of investigation and analysis of several issues regarding the legal aspects of construction and operation of Kyiv City Ring Road from Stolychne shose Str. to M03 Kyiv–Kharkiv–Dovzhanskyi motor road in the Kyiv– Boryspil section (hereinafter referred to as the “CRR”) on the terms of public-private partnership and concession (hereinafter the “Project”).
1.1. Subject Matter of Analysis
Based on the nature of the research, we have focused our attention exclusively on the legal aspects that appear to be the most important for the Project, specifically: (i) review of the applicable Ukrainian regulations on concessions, public-private partnership, and 2 / 81
public procurement; (іі) the most practical ways for redemption and expropriation of Land Plots; (ііі) procedure of the concession bidding; and (іv) legal description of a concession agreement.
Our research was based on the Ukrainian law effective as of the date of the Report, as well as the application practice established in the respective areas. While forming the recommendations included in the Report, we also took into account the foreign and international experience.
The statements made in the Report are of the most general nature, reflecting only the selected aspects of the Project which, in our opinion, have the key importance; the Report only describes several options for the further development of the Project which we believe to be optimal. The report mainly consists of the answers to the questions stated by the customer and generalized conclusions of our legal analysis of the subject matter of our research. We did not raise any other questions other than stated above.
1.2. Assumptions
We used the following assumptions while preparing the Report:
- The land plots that have to be allocated for the construction of the CRR may include land plots privately owned citizens and legal entities, held for permanent use, or leased.
- The land plots that have to be allocated for the construction of the CRR include agricultural and forestry land (covered by tillage or perennial plantations).
- The land plots that have to be allocated for the construction of the CRR include plots of especially valuable land, land of the natural reserve fund (in particular occupied by nature reserve areas), and land with bodies of water.
- The legal conclusions made in the Report are based exclusively on the information and documents publicly available from official sources.
- The CRR construction project will be performed according to the current law, excluding legislative changes that cannot currently be foreseen. The currently effective regulations will not be appealed against according to the procedure specified by law and will not become ineffective.
- The Project will be performed without active resistance on the part of certain government agencies which may influence the performance of the Project.
1.3. Limitations and Qualifications
The analysis was performed based on the current Ukrainian law; no other law or legislation of other countries were taken into account. Consequently, the Report only covers the matters to which the Ukrainian law applies.
The Report is prepared exclusively for the Family Health International (FHI360) for evaluation of legal circumstances for the implementation of the Project in Ukraine, and cannot be used for any other purposes. The Report as a whole or certain provisions hereof shall not be used, distributed, quoted, or used in any other way except for the purpose of your internal evaluation of further activities under the Project. Neither the fact of the preparation nor the content of the Report shall not be disclosed to any third parties. No one except for the Family Health International (FHI360) may use
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and/or refer to the Report without prior written consent of a partner of Vasyl Kisil and Partners Law Firm.
The Report, as well as our obligations and liability, shall be governed exclusively by the Ukrainian law. Consequently, only the Ukrainian courts may resolve any possible disputes in connection with the Report.
With any questions, please contact Oleh Alioshyn, partner of Vasyl Kisil and Partners Law Firm; Nataliia Dotsenko-Bilous, advisor of Vasyl Kisil and Partners Law Firm, or Volodymyr Ihonin, chief lawyer of Vasyl Kisil and Partners Law Firm, at vul. Bohdana Khmelnytskoho, 17/52A, Kyiv, 01030 Ukraine, tel.: +380445817777. Roman Riabenko and Dariia Bohatchuk, lawyers of Vasyl Kisil and Partners Law Firm, also took part in the preparation of the Report.
2. LEGAL ANALYSIS OF THE LEGISLATION IN THE AREA OF ROAD CONSTRUCTION ON THE TERMS OF PPP
2.1. Major laws and subordinate legislative instruments on public procurement and concessions
The major laws of Ukraine regulating the relations arising from, or in connection with, the engagement of private companies for construction, operation, and maintenance of motor roads are:
- The Economic Code of Ukraine of January 16, 2003, No. 437-IV, providing legal grounds for development of special legislation on concessions;
- Law of Ukraine “On Motor Roads” of September 08, 2005, No. 2862-IV, defining the criteria for establishment of the status of roads and criteria for classification of roads by importance, and establishing the grounds for funding of construction and further use of motor roads. The law provides for construction and operation of motor roads on the terms of concession;
- Law of Ukraine “On Concessions” of July 16, 1999, № 997-XIV, defining all major mechanisms, procedures, and principles for implementation of concessions and regulation of concession relations between the concessionaire and the concessor. All special laws on concession must be adopted in accordance with this law and must comply with the basic principles established in the said law.
- Law of Ukraine “On Concessions for Construction and Operation of Motor Roads” of December 14, 1999, No. 1286-XIV, defining the special procedures for regulation of concession relations established in the area of construction and operation of motor roads on the terms of concession. This law is the main special law regulating the construction and operation of motor roads on the terms of concession; all other regulations and legislative instruments on the said issue must be in conformity with this law.
- Law of Ukraine “On Sources of Funding for the Road System of Ukraine” of September 18. 1991, No. 1562-ХІІ.
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Under these legislative instruments, the Cabinet of Ministers of Ukraine is authorized to determine the state properties which may be granted under a concession.
According to these major legislative instruments, the Cabinet of Ministers of Ukraine and Ukravtodor (State Motor Roads Agency) have developed several special regulations and provisions with detailed concession procedures. Such special legislative instruments include:
- Resolution of the Cabinet of Ministers of Ukraine “On the Registry of Concession Agreements” of January 18, 2000, No. 72, establishing a detailed procedure for registration of concession agreements;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Regulation on Concession Bidding and Execution of Concession Agreements for State and Municipal Property Granted under Concession” of April 12, 2000, No. 642, providing detailed regulation of the concession bidding procedures and step-by-step procedures a concessionaire has to follow in the course of the concession bidding;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Reimbursement of Free of Charge Travel by Motor Roads Constructed on the Terms of Concession” of July 06, 2000, No. 1065, which establishes a list of vehicles and cases of free of charge travel by motor roads constructed on the terms of concession, as well as the procedure for reimbursement of free of charge travel.
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Standard Concession Agreement for Construction and Operation of a Motor Road” of October 04, 2000, No. 1519, establishing a standard concession agreement to be followed when drafting a concession agreement for construction, operation, and maintenance of a motor road;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure of Concession Bidding for Construction and Operation of Motor Roads” of October 04, 2000, No. 1521, establishing the procedure of concession bidding;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Technique for Calculation of Concession Payments” of April 12, 2000, No. 639;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Identification of Concession Properties Allowing the Concessionaires to Receive Discounts on Concession Payments, Allowances, Compensations, and Terms for Provision” of July 13, 2000 No. 1114;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Unified Rules for Repairs and Maintenance of Motor Roads, Streets, and Railway Crossings and Rules for Operation and Protection Thereof” of March 30, 1994, No. 198;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Technique for Calculation of Payments for Provision of Concession for Construction and Operation of Motor Roads” of March 12, 2003 No. 319;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Establishment of the Maximum Payment for Travel on Motor Roads Constructed on the Terms of Concession” of August 22, 2000 No. 1299, establishing the grounds and the procedure for setting the maximum amount of payment, change of the payment amount, and procedure for approval thereof. 5 / 81
Please note that the mechanism of public procurement (purchase of goods, works, and services at the expense of the state) does not apply for the regulation of legal relations between the state (as represented by, for instance, Ukravtodor or the State Agency for Investment and National Projects) and an investor; instead, such relations are formalized by executing a concession agreement, under which the investors is a concessionaire and undertakes to fund the construction of the motor road at its own expense. In other cases the appropriate public procurement mechanism must be followed.
- Law of Ukraine “On Insurance” of March 07, 1996, No. 85/96-VR, as further amended and expanded, regulating the insurance relations and providing for mandatory insurance of property granted on the terms of concession (which is also reflected in the Law of Ukraine “On Concessions”). Obtaining insurance for the property granted on the terms of concession is an obligation of the concessionaire, which involves additional insurance costs.
- Law of Ukraine “On Public-Private Partnership” of July 01, 2010 No. 2404-VI, establishing the organizational and legal grounds for cooperation between public partners and private partners, as well as the basic principles of public-private partnership on contractual basis. The procedures provided for by this law are somewhat different from the protocols and procedures specified in the concession laws.
2.2. Current Tax Laws
Major tax and financial laws:
- Budget Code of Ukraine of July 08, 2010, No. 2456-VI to the extent related to the general principles of the use of public funds, subventions, state programs, etc.;
- Tax Code of Ukraine of December 02, 2010 No. 2755-VI, as amended, establishing the rates and discounts, procedure of accrual, calculation, registration, and reporting for the purposes of tax payments;
- Tax Code of Ukraine of March 13, 2012 No. 4495-VI will apply in the course of the import of products for the purposes of motor road construction; and
- The Law of Ukraine “On 2014 State Budget of Ukraine” of January 16, 2014, No. 719- VIІ, as well as the respective laws for the following years over the duration of the project, establish the amount of investments, state guarantees, and financial aid to be provided by the state for development of infrastructure projects, and may provide for certain tax discounts for entities involved in economic relations in certain sectors.
2.3. Registration and Protection of Investments
The investments are accounted for according to the following legislative instruments:
- Law of Ukraine “On Accounting and Financial Statements in Ukraine” of July 16, 1999, No. 996-XIV;
- Directive of the Ministry of Finances of Ukraine “On Approval of the Plan of Business Accounts and Instruction for Application Thereof” of November 30, 1999, No. 291, registered with the Ministry of Justice of Ukraine on December 21, 1999, No. 892/4185;
- Accounting Regulations (Standards) No. 1–34; 6 / 81
- Directive of the Ministry of Finances of Ukraine “On Approval of the Regulation on the Procedure of Accounting of Selected Assets and Transactions and Amendments to Selected Regulations of the Ministry of Finances of Ukraine on Accounting”
of December 19, 2006, No. 1213, registered with the Ministry of Justice of Ukraine on December 26, 2006 No. 1363/13237.
Law of Ukraine “On Investment Activity” of September 18, 1991, No. 1560-XII, as amended. This law defines and establishes the principles of protection on investments into a project as well as terms, guarantees, and procedure of recovery of the respective investments.
Law of Ukraine “On the Procedure of Foreign Investment in Ukraine” of March 19, 1996, No. 93/96-VR, has to be taken into account by foreign corporate investors (in particular under concession agreements).
Other legislative instruments regulating foreign investments include:
- Decree of the Cabinet of Ministers of Ukraine “On the System of Currency Reserves and Currency Control” of February 19, 1993 No. 15–93;
- Resolution of the National Bank of Ukraine “On Regulation of Matters of Foreign Investment in Ukraine” of August 10, 2005 No. 280 registered with the Ministry of Justice of Ukraine on August 29, 2005 No. 947/11227.
2.4. Legislation on Investments, Construction, and Commissioning
The major laws establishing the general principles and requirements to be observed in the course of development and construction of real estate properties are:
- The Land Code of Ukraine of October 25, 2003 No. 435-IV as amended (hereinafter the “LC”) governs the procedure of expropriation, disposal, acquisition, operation, etc. of land plots;
- Civil Code of Ukraine of January 16, 2001 No. 2768-III as amended regulates the general civil law and contractual relations, matters of registration and transfer of ownership, property management, and work and service agreements;
- The Law of Ukraine “On State Registration of Property Rights to Real Estate and Encumbrances” of July 01, 2004 No. 1952-ІV, as amended;
- Law of Ukraine “On Land Lease” of October 06, 1998 No. 161-XIV, as amended and expanded, as related to the termination of land lease;
- Law of Ukraine “On Architectural Activity” of May 20, 1999, No. 687-XIV, as amended, to the extent regulating the development, approval, and adjustment of design documentation related to the construction of facilities;
- Law of Ukraine “On Regulation of Urban Development Activities” of February 17, 2011, No. 3038-VI, as amended and expanded, regulating all design procedures starting from the development of the general concept, general plan, and detailed plans of the territories, to the design, approval, public discussion, commissioning, etc., of specific facilities;
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- Law of Ukraine “On Foundations of Urban Development” of November 16, 1992 No. 2780-XII, as amended;
- Law of Ukraine “On Liability for Violations in Urban Planning” of October 14, 1994 No. 208/94-VR as amended, establishing the penalties for violation of the urban planning laws;
- Law of Ukraine “On Beautification of Populated Areas” of September 06, 2005 No. 2807-IV;
- Civil Defense Code of Ukraine of October 02, 2012, No. 5403-VI, as amended, regulating the relations connected with the protection of the population, territories, environment, and property from emergencies;
- Law of Ukraine “On Protection of Cultural Heritage” of June 08, 2000, No. 1805-III, as amended.
The special legislative instruments and regulations on construction of roads are:
- Resolution of the Cabinet of Ministers of Ukraine “On Procedure of Commissioning of Finished Construction Projects” of April 13, 2011 No. 461, establishing the general procedure and requirements for commissioning of construction projects;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Approval of Construction Projects and Expert Assessment Thereof, and Invalidation of Selected Resolutions of the Cabinet of Ministers of Ukraine” of May 11, 2011 No. 560, establishing the procedure of expert assessment of investment programs and construction projects, and the related authority of government agencies and state institutions;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Expert Assessment of Urban Development Documents” of May 25, 2011 No. 548;
- Resolution of the Cabinet of Ministers of Ukraine “Selected Issues of Performance of Preparation and Construction Operations” of April 13, 2011 No. 466, adopting the Procedure for Performance of Preparation Operations and the Procedure for Performance of Construction Operations;
- Directive of the Ministry of Construction, Architecture, Housing, and Utilities of Ukraine “On Approval of the Regulation on the Procedure of Suspension and Restoration of Construction Projects” of October 21, 2005 No. 222, registered with the Ministry of Justice of Ukraine on December 29, 2005 under No. 1582/11862;
- Directive of the Ministry of Regional Development, Construction, Housing and Utilities of Ukraine “On Approval of the Procedure for Issue of a Construction Passport for Construction on a Land Plot” of July 05, 2011 No. 103, registered with the Ministry of Justice of Ukraine on July 22, 2011 under No. 902/19640;
- Directive of the Ministry of Health of Ukraine “On Approval of the State Sanitation Rules for Design and Construction in Populated Areas” of June 19, 1996 No. 173, registered with the Ministry of Justice of Ukraine on July 24, 1996, under No. 379/1404;
- Directive of the Ministry of Regional Development, Construction, Housing and Utilities of Ukraine “On Approval of the State Construction Standard DBN A.2.2-3-2012 8 / 81
“Content, Procedure of Development, Negotiation, and Approval of Construction Documents” of March 03, 2012 No. 98;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the General Terms for Execution and Performance of Contractor Agreements in Capital Construction” of August 01, 2005 No. 668;
- Directive of the Ministry of Regional Development and Construction of Ukraine “On Publication of Recommendations for Preparation of Annexes to Contractor Agreements in Capital Construction” of January 13, 2009 No. 2;
- various construction regulations, rules, and resolutions.
2.5. Ukrainian Environmental Law
The major special laws that have to be complied with in the course of construction project development and construction are:
- The Law of Ukraine “On Environment Protection” of June 25, 1991 No. 1264-XII, as amended;
- Law of Ukraine “On Environmental Audit” of February 09, 1995 No. 45/95-VR, as amended;
- Law of Ukraine “On Protection of Land” of June 19, 2003, No. 962-IV to the extent related to the requirements for construction from the standpoint of use and protection of land;
- Law of Ukraine “On Sate Supervision of the Use and Protection of Land” of June 19, 2003 No. 963-IV to the extent related to the state supervision of the use of land, in particular in the process of construction;
- Law of Ukraine “On Ensuring Sanitary and Epidemiologic Safety of the Population” of February 24, 1994, No. 4004-XII;
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Types of Activity and Facilities of Increased Environmental Hazard” of August 28, 2013, No. 808, according to the construction of motor roads is considered to constitute an increased environmental hazard, and the motor road construction projects require state environmental audit.
The compliance of the construction project to the requirements specified in the abovementioned laws and special regulations developed based on such laws is verified at the stage of state expert assessment of the motor road construction project.
2.6. Special Regulations on Kyiv City Ring Road
- According to the Directive of the Cabinet of Ministers of Ukraine of April 11, 2011 No. 313-r “On Organization of Construction of Infrastructure Facilities in the Kyiv Region”, as revised by the Resolution of the Cabinet of Ministers of Ukraine of September 19, 2011, No. 982, the CRR is a component of the “Kyiv Region Infrastructure Facilities” project, which, in turn, is a component of the Air Express national project. It is specified that the feasibility studies require approval by the Cabinet of Ministers of Ukraine and determine the project performance time. The function of the contracting authority for the performance of the project components is entrusted to the 9 / 81
Directorate for Construction and Management of the ‘Air Express’ National Project and Other Infrastructure Facilities of the Kyiv Region, State Enterprise. The issues of taking a loan under state guarantees for the implementation of the project shall be reviewed at the stage of approval of the project feasibility study. The issues of allocating land plots for the construction of infrastructure facilities in the Kyiv Region shall be resolved by the State Agency for Land Resources, State Agency for Forest Resources, Kyiv City and Kyiv Oblast State Administrations according to the prescribed procedure.
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the Regulation on Projects in the Priority Areas of Socioeconomic and Cultural Development (National Projects)” of December 8, 2010 No. 1255 specifies the procedure for preparation and implementation of projects in the priority areas of socioeconomic and cultural development (national projects), including the CRR Construction Project.
- The Cabinet of Ministers of Ukraine, by its Resolution of July 17, 2013 No. 640 “Selected Matters of Construction of the Kyiv City Ring Road from Stolychne shose Str. to M03 Kyiv–Kharkiv–Dovzhanskyi motor road in the Kyiv–Boryspil section”,
- approved the preliminary feasibility study of the CRR project;
- specified that the project shall be implemented on the terms of concession for construction and operation of motor roads;
- authorized the State Agency for Investment and National Projects to hold the concession bidding (on the terms approved by the Ministry of Economic Development and Trade, Ministry of Finance, and Ministry of Justice, and approved by the Cabinet of Ministers of Ukraine) and execution of a concession agreement; and
- approved the cooperation within the project with the International Financial Corporation (according to proposals of the State Agency for Investment and National Projects).
- Resolution of the Cabinet of Ministers of Ukraine “On Approval of the List of State Properties Allowed to be Granted under a Concession” of December 11, 1999, No. 2293, as amended, allows the construction of the CRR on the terms of concession for satisfaction of public needs. The State Agency for Investment and National Projects is authorized to be the concessor.
3. KEY STAGES OF THE ROAD CONSTRUCTION PROJECT: LEGAL DESCRIPTION
The key stages for construction of the Kyiv City Ring Road from Stolychne shose Str. to M03 Kyiv-Kharkiv-Dovzhanskyi motor road in the Kyiv-Boryspil section (the CRR) are as follows:
1. Cabinet of Ministers of Ukraine, or an agency authorized by it, making the decision to perform the PPP.
2. Determining the private partner for implementation of the public-private partnership (PPP) project for construction of the CRR based on the results of the bidding procedure.
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3. Execution of the concession agreement for construction of the CRR under PPP.
4. Withdrawal of land plots from private property, termination of rights for permanent use of land plots, and termination of lease agreements by the public partner (State Agency for Investment and National Projects) on the grounds of public need.
5. Development and approval of land surveying documents for allocation of land plots for construction of the CRR. The implementation of this stage is the responsibility of the public partner.
6. Receiving of leased land plots for the Project performance time under PPP (5 to 50 years).
7. Development of the CRR construction project by a design organization engaged by the private partner. Mandatory state expert assessment of the project.
8. Procurement of a construction permit. Construction activities.
9. Commissioning of the CRR.
10. Distribution of concession income.
4. SCENARIOS FOR IMPLEMENTATION OF THE ROAD CONSTRUCTION PROJECT: GENERAL DESCRIPTION
4.1. Public Procurement
The public procurement shall be performed according to the annual plan prepared and approved by the bidding committee (established by the contracting authority). The information on public procurement is published on the website of the Ministry of Economic Development and Trade of Ukraine. The public procurement is performed according to the procedures established by the Law of Ukraine “On Public Procurement” of April 10, 2014, No. 1197-VII. The procurement may be performed through one of the following procedures:
- open bidding (single stage, where the contracting authority immediately establishes the criteria for evaluation of the bidders);
- two-stage bidding (at the first stage, all bidders submit preliminary bids without indicating the price);
- request for quotes (for goods and services for which a continuous market exists, on condition that the price of such goods and services does not exceed UAH 300 thousand; the bid with the lowest price wins);
- pre-qualification of bidders (if the bidders need to be checked for qualification, financial and economic situation, and technical and organizational capabilities; all bidders, but not less than two, who passed such qualification, shall be admitted); and
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- a negotiated procurement procedure (used as an exception, in particular in case with procurements related to the protection of intellectual property rights or execution of a procurement agreement with a winner of an architectural contest, in case of additional procurement, etc.).
If the open bidding, two-stage bidding, or bidder pre-qualification procedures are used, it is also possible to execute framework agreements which may fully or partially stipulate the material terms of the procurement agreement, as well as the bidder evaluation criteria.
If the bidding documents require a collateral against the performance of the procurement agreement, the contracting authority may demand the winning bidder to provide such collateral. The contracting authority shall return the collateral against the performance of the procurement agreement after the winning bidder performs the agreement.
4.2. Project Financing
In case of implementation of the project using the funds of private investors on the terms of a loan, a public procurement mechanism as specified in the Law of Ukraine “On Public Procurement” of April 10, 2014 No. 1197-VII shall be applied.
The purchase of goods, works, and services using the funds of credits and loans provided under the international agreements between Ukraine and the International Bank for Reconstruction and Development, International Financial Corporation, Multilateral Investment Guarantee Agency, International Development Association, European Bank for Reconstruction and Development, European Investment Bank, Nordic Investment Bank, and other international monetary and credit organizations, shall be performed according to the rules and procedures established by such organizations, and in case no such rules and procedures are established, according to the abovementioned Law. The purchase of goods, works, and services on the terms of co-financing within the projects implemented using the abovementioned credits and loans shall be performed according to the rules and procedures established by the respective organizations, and in case no such rules and procedures are established, according to the abovementioned Law.
The Cabinet of Ministers of Ukraine shall make the decision on the provision of state guarantees and act as a guarantor in relation to the loans provided by foreign states, banks, and international financial institutions to the extent specified in the law on the State Budget of Ukraine, and in other cases according to international agreements signed by Ukraine and ratified by the Verkhovna Rada of Ukraine. According to the Budget Code of Ukraine, when state borrowings are made or state guarantees are given, the member of the Cabinet of Ministers of Ukraine responsible for formation and implementation of the state budget policy or the person acting as such member may, based on the decision of the Cabinet of Ministers of Ukraine, assume obligations on behalf of Ukraine related to the performance of such borrowings, in particular to refusal from sovereign immunity in possible legal action regarding the repayment of credits (loans) during the time the obligation to repay the borrowed funds is in effect.
The maximum limit of the state debt and maximum limit of state guarantees shall be determined for each budgetary period by the law on the State Budget of Ukraine.
State guarantees shall not be given to secure debt obligations of economic entities if the credits (loans) are planned to be repaid directly from the state budget funds, except for debt obligations under credits (loans) received from international financial institutions. 12 / 81
A mandatory condition for provision of a state guarantee is execution of an agreement between the Cabinet of Ministers of Ukraine and the borrower about the payment for provision of the guarantee, material or other security of the obligations under the guarantee, reimbursement of the state budget costs for the performance of guarantee obligations, interest-based penalty for delay of such reimbursement, and the rights of the guarantor for direct debit transfer by the bank from the accounts of such economic entity to the benefit of the guarantor.
4.3. Concessions as a Type of PPP
The foundations of public-private partnership are established by the Law of Ukraine “On Public-Private Partnership” of July 01, 2010 No. 2404-VI. The construction and/or operation of motor roads, roads, bridges, overpasses, tunnels, and infrastructure thereof belongs to the spheres directly identified by the law as subject to public-private partnership (PPP). Concession is one of the agreements expressly provided for by the law as possible in the course of PPP.
In order for the concession agreement in relation to state property to be regulated within the PPP framework, the respective decision has to be made by the Cabinet of Ministers of Ukraine or an agency authorized by it. The respective proposal may be prepared by the competent government agency (in cast of CRR, the State Agency for Investment and National Projects) or persons who may be private partners.
The mechanism of public procurement (purchase of goods, works, and services at the expense of the state) does not apply for the regulation of legal relations between the state (as represented by, for instance, the State Agency for Investment and National Projects) and an investor; instead, such relations are formalized by executing a concession agreement, under which the investors is a concessionaire and undertakes to fund the construction of the motor road at its own expense.
The features of PPP include:
- The operations must have levels of technical and economic efficiency than the same of the public partner without engaging a private partner;
- Long-term relations (5 to 50 years)
- Transfer of some risks in the course of public–private partnership to the private partner;
- Private partner’s introduction of investments to the target of the partnership from legitimate sources;
The main principles of performance of PPP include:
- equality of the public and private partners before the law;
- prohibition of any discrimination of rights of public or private partners;
- coordination of interests of public and private partner in order to produce mutual benefit;
- invariability of the designated purpose and form of ownership of properties owned by the state, municipality, or the Autonomous Republic of Crimea transferred to the 13 / 81
private partner throughout the effective period of the public-private partnership agreement;
- public and private partners’ recognition of the rights and obligations specified by the Ukrainian law and established by the terms of the public-private partnership law;
- fair division of risks related to the performance of the public-private partnership agreements between the public and private partners; and
- selection of the private partner on a competitive basis, except in cases specified by law.
Funding of the motor road shall be performed according to the cost estimate for construction and operational maintenance thereof stipulated in the concession agreement. The agreement also stipulates the division of costs for construction and operational maintenance between the parties (funding using the state funds and funding at the expense of the concessionaire) indicating the amounts and duration of funding. The amount of funding for the costs of purchasing the required property and party responsible for such funding, as well as the amount of concessionaire’s compensations related to the transfer of ownership of the constructed properties to the state shall be established separately.
The concessor may partly fund (co-finance) the construction and/or operation of motor roads on the terms of concession within the amounts and according to the procedure specified in the concession agreement at the expense of funds provided for in the special fund of the state budget for development of the network and maintenance of public motor roads.
From the moment the concessionaire receives income from the operation of the motor road, the concessionaire shall make the concession payments according to the terms of the concession agreement regardless from the results of the economic activity. The concession payments shall be credited to the State Budget of Ukraine and used only for the funding of construction, renovation, repairs, and maintenance of public motor roads.
Public-private partnership (PPP) may be funded using:
- financial resources of the private partner;
- financial resources borrowed according to the prescribed procedure;
- funds of the state and local budgets; or
- other sources not prohibited by law.
The funding of works under public-private partnership (PPP) for development (preparation) of surveying documents and expert assessment thereof shall be performed at the expense of the respective budgets or the person filing the proposal for public- private partnership.
In the course of PPP, the payment for the development (preparation) of surveying documents and expert assessment thereof by the person filing the proposal for public- private partnership shall not give such person any advantages in the bidding for selection of the private partner against other bidders.
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5. CONSTRUCTION AND OPERATION OF ROADS ON THE TERMS OF CONCESSION
5.1. General description of concession for construction and operation of motor roads. Key legal premises for concession for construction and service of Kyiv City Ring Road
According to Article 1 of the Law of Ukraine “On Concessions for Construction and Operation of Motor Roads”, concession is defined as “provision of a right for construction and/or operation of a motor road by the concessor to the concessionaire based on a concession agreement on condition of the concessionaire’s obligations to build and/or operate it”. The same law defines the construction of a motor roads as “set of road construction operations related to construction, reconstruction, and capital repairs of motor roads”.
The Law of Ukraine “On Concessions” defines concessions as follows: “provision of a right for creation (construction) and/or management (operation) of a concession property (leased) for the purpose of satisfaction of public needs by an authorized executive government agency or a local self-governance body under a concession agreement on a paid basis for a limited period of time to a legal entity or individual (business entity) on condition that the business entity (concessionaire) assumes the obligations to create (construct) and/or manage (operate) the concession property, material liability, and possible business risk”.
The abovementioned laws do not specify whether design operations and preparatory activities can be performed within a concession project, and who is responsible for such operations and activities. The respective proposals are given in Section 6 of the Report.
According to the state program for development of public motor roads and considering the socioeconomic effectiveness of such roads, the Cabinet of Ministers of Ukraine determines the concession properties in the sphere of construction and/or operation of motor roads and approves the list of such properties. The resolution to perform the construction and/or operation of motor roads on the terms of concession is made by the Cabinet of Ministers of Ukraine based on a feasibility study.
The list of state-owned properties which may be granted under concession was approved by the Resolution of the Cabinet of Ministers of Ukraine of December 11, 1999, No. 2293 (as amended and expanded). In particular, the list includes the item “Kyiv City Ring Road from Stolychne shose Str. to M03 Kyiv-Kharkiv-Dovzhanskyi motor road in the Kyiv-Boryspil section”; the agency authorized to execute the concession agreement (the concessor) is the State Agency for Investment and Management of National Projects. The property may be granted under concession by separate sections (stages) at the concessor’s discretion.
The Resolution of the Cabinet of Ministers of Ukraine of July 17, 2013 No. 640 “Selected Matters of Construction of the Kyiv City Ring Road from Stolychne shose Str. to Kyiv–Kharkiv–Dovzhanskyi motor road in the Kyiv–Boryspil section” (hereinafter also referred to as “Resolution of the Cabinet of Ministers of Ukraine No. 640”) specifies that the City Ring Road project shall be implemented on the terms
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of concession for construction and operation of motor roads at the expense of private investors as well as the funds of the state budget provided according to the law.
5.2. Selection and Engagement of a Concessionaire: Procedural Issues
5.2.1. Which procedures exist in relation to the procurement and the process of selection, including, but not limited to, timeline, amount of work, prerequisites to be complied with (if any), bid submission, required documents, and establishment of criteria for participation in the bidding?
The general principles of the concession bidding are specified in the Law “On Concessions”. The procedure of concession bidding for construction and operation of motor roads is approved by the Resolution of the Cabinet of Ministers of Ukraine of October 04, 2000, No. 1521. According to the procedure, the bidding shall be performed in two stages. The preliminary evaluation stage is mainly intended to evaluate the identity of the bidder, their financial capability, and experience. At the second stage, the selected applicants provide detailed bids developed according to the full package of bidding documents.
The procedure specifies that after the bidding procedure is announced, any legal entity that wishes to take part in it shall send the bidding committee a concession application for participation in the bidding. Among other things, the following shall be attached to a concession application: (і) details confirming the applicant’s capability to ensure proper funding of the concession activity; (іі) documents on the applicant’s financial and material standing; (ііі) details about the experience possessed and capability of technological and organizational support of the concession activity. The concessor, based on the conclusions of the bidding committee, shall make the decisions to admit (dismiss) the applicants for participation in the bidding. Within two weeks after the concessor’s decision, the bidding committee shall notify the applicants about the admission to (dismissal from) the participation in the bidding procedure, indicating the grounds for refusal.
The procedure, submission deadline, and rules for preparation of the bids are determined by the bidding documents. Based on the conclusions of the bidding committee, the concessor shall make the decision about the winner of the bidding procedure within one week after receiving the minutes of the bidding committee. The bidding committee shall notify the winning bidder about such decision within five days.
Within five days after the decision on the winner of the bidding procedure is made, the bidding committee, upon authorization by the concessor, must send the winning bidder a notice and an invitation for negotiations for approval of the final version of the concession agreement and signature thereof, and publish the bidding results in printed media (specified in section 5.2.4 of the Report) within ten working days. Upon agreement, the Parties may make amendments and additions to the draft concession agreement which do not concern the material terms indicated in the bidding documents or in the bid of the winning bidder. The concession agreement shall be signed by the concessor and the winning bidder within one week after the approval of the draft concession agreement.
5.2.2. Are these procedures transparent and easy to comply with? Or are there inconsistencies among different laws / legislative instruments regarding the implementation, or other “gray spots” in the law?
Given the insufficient practice of bidding procedures for construction and operation of motor roads according to the procedure approved by the Cabinet of Ministers (see 16 / 81
section 5.2.1 of the Report), it is difficult to assess how transparent and easy to comply with such procedures are from a practical standpoint. It should be mentioned that the procedure was adopted according to a previous revision of the Law “On Concessions for Construction and Operation of Motor Roads”, which was fully revised in 2009. Thus the change of this procedure is possible and desirable.
According to article 3 of the Law “On Concessions for Construction and Operation of Motor Roads”, the terms of the concession bidding shall be approved by the central executive government body performing state management of public motor roads (Ukravtodor). At the same time, the Law of Ukraine “On Concessions” authorizes the concessor to approve the terms of the concession bidding. According to the Law “On Concessions for Construction and Operation of Motor Roads”, the concessor is the state as represented by the Cabinet of Ministers of Ukraine or an executive government body authorized by it, and not only the Ukravtodor; therefore, inconsistencies may arise when the abovementioned provisions are applied. In particular, as follows from the Resolution of the Cabinet of Ministers of Ukraine No. 640, the terms of the concession bidding in relation to the CRR have to be approved by the State Agency for Investment and National Projects, designated as the concessor, which does not conform with the provisions of the Law “On Concessions for Construction and Operation of Motor Roads”. It is an ambiguous issue whether some procedures specified in the Law of Ukraine “On Public-Private Partnership” must be applied to motor road concessions. The proposals of the changes necessary to remove the inconsistencies are provided in Section 6 of the Report.
Concessions (including motor road concessions) are one of the forms of public-private partnership provided for in article 5, part 1, of the Law “On Public-Private Partnership”. At the same time, article 5, part 3, of the same law specifies that the agreements made according to part one of the same article are regulated by the law taking into account the specific aspects provided for in this Law in case a decision for public-private partnership in relation to them is made according to the procedure prescribed by this Law.
According to the Law “On Concessions for Construction and Operation of Motor Roads”, the procedure of the concession bidding for construction and/or operation of motor roads shall be approved by the Cabinet of Ministers of Ukraine according to the law. A similar provision exists in the Law “On Concessions” (article 7. part 11). Therefore, taking into account the provisions of article 14, part 2, of the Law of Ukraine “On Public-Private Partnership”, which give the priority to special regulations, the procedure for selection of a private partner provided for in this Law does not apply to concession activities, since special laws regarding the concession bidding exist.
The respective proposals of amendments to the legislation are provided in Section 6 of the Report.
5.2.3. Are there regulations regarding the selection procedure that contradict the best international practices? Which remedies can be used to ensure transparency and equal conditions of the bidding process?
The procedure of concession bidding for construction and operation of motor roads approved by the Resolution of the Cabinet of Ministers of Ukraine of October 04, 2000, No. 1521 does not fully account for the best international practices. In particular, it does not ensure an ability to freely participate in the bidding procedure for non-resident legal entities, consortia, or other associations of legal entities. The matters of participation of several shareholders in a special purpose legal entity on the concessionaire’s side (for example, shareholders funding the project), as well as possibility of participation in 17 / 81
such special purpose legal entity by the public partner as represented by a certain government agency.
The procedure does not specify whether an applicant may refer in its bid to the experience of its affiliates, such as parent companies or subsidiaries, consortia or other associations involving the applicant, etc.
The approved procedure does not provide for a separate stage for negotiations for clarification of requirements for the project. At the same time, it is possible to hold such negotiations between the stage of preliminary qualification and the stage of qualification with the selected applicants, if such negotiations are provided for in the bidding documents.
According to the procedure, the concession agreement becomes effective on the day it is signed. However, in the best international practice the entry of the agreement into force is often conditional on the performance of several preliminary requirements, in particular those related to the provision of funding (the so-called "commercial closure" or "financial closure").
5.2.4. Are competitive negotiations allowed (i. e. negotiations with several bidders simultaneously with different versions of bidding documents provided to them for comments)?
According to the procedure of the concession bidding (see section 5.2.1 of the Report), the information about the announcement of a bidding procedure for award of new concession or renewal of expired concessions is published by the concessor in the “Uriadovyi kurier” and “Holos Ukrainy” newspapers or in the printed media of the respective local self-governance body. The procedure also specifies a rather extensive amount of information that must be contained in such announcement.
The applicants whose bids were admitted to the bidding procedure by the bidding committee receive the bidding documents. Provision of different versions of the bidding documents to the applicants is not provided for.
5.3. Funding of a Concession Project: Legal Aspects
Which mechanisms does the law establish for participation of the state in the funding of the projects? Does the law provide sufficient flexibility for the state support in the construction and operation of roads?
The Law of Ukraine “On Sources of Funding for the Road System of Ukraine” provides for establishment of the State Road Fund of Ukraine. The income part of this fund shall be formed by the revenue from the excise tax and import duty for oil products, excise tax and import duty for the vehicles and tires imported into the customs territory of Ukraine, and other revenue to the State Budget of Ukraine in the amount specified in the law on the State Budget of Ukraine for the current year, as well as other revenue, in particular the fee for concession or lease of roads or road toll, voluntary contributions by legal entities and individuals, including foreign ones, associations of citizens, international organizations, etc.; and other revenue allowed under the Ukrainian law. Apart from the State Road Fund, the law provides for creation of territorial road funds.
The CRR Construction Project is covered by the Regulation on Projects in the Priority Areas of Socioeconomic and Cultural Development (National Projects), approved by the Resolution of the Cabinet of Ministers of Ukraine of December 8, 2010 No. 1255. According to the Regulation, the national projects are funded at the expense of (i) 18 / 81
funds of private investors, international financial institutions, credit resources; and (іі) other sources and funds of the state and local budgets. State support for implementation of national projects may, in particular, be provided in the form of: - co-funding from the state and/or local budgets;
- state and local guarantees according to the law in order to ensure the performance of debt obligations under the loans received by economic entities;
- issue of credits at the expense of the state or local budgets;
- full or partial reimbursement of interest on credits received by economic entities at the expense of the funds of the state or local budgets.
Therefore, the law provides sufficient flexibility for state support of the Project.
Which conditions does a private organization have to meet in order to receive maintenance payments? Is the procedure of provision of availability payments sufficiently transparent and easy to comply with? Do the existing limits allow adjusting the availability payments?
The Law of Ukraine “On Concessions for Construction and Operation of Motor Roads” categorizes the payment for operational availability of the motor road contributed by the concessor as a source of the concessionaire’s income from operation of the motor roads. In order to receive the payment, the concessionaire must ensure the commissioning of the road. In order to receive such payment, the concessionaire must ensure the conformity of the transportation and operational status of the motor roads with the standards and regulations on maintenance of public motor roads. The requirements to motor roads are specified in the State Construction Standard DBN V.2.3-4:2007 “Transportation Structures. Motor Roads” as well as in other documents and regulations.
In pursuance of the Law “On Concessions for Construction and Operation of Motor Roads”, the Cabinet of Ministers, in its resolution No. 493 of July 11, 2013, approved the Procedure for Calculation of Payment for Operational Availability of a Motor Road Constructed on the Terms of Concession. According to the procedure, the payment for operational availability of a motor roads consists of a total of costs for the construction and operation of the motor road. The payment is calculated per month of operation of a road starting from the date of commissioning until the expiry of the concession agreement. The road construction costs include the costs of construction and reconstruction and/or capital repairs of the road according to the approved design documents and the provisions of the concession agreement. The road operation costs consist of the cost of small current repairs and operational maintenance of the road according to the approved standards and regulations for maintenance of public motor roads and provisions of the concession agreement. The procedure contains a formula for calculation of the operational availability fee.
Pi = B : S х Kb х Iі + E : 12 х D х Ke,
where Pi is the fee for one month of motor road operation, UAH thousands; i is the month of motor road operation; B are the costs of motor road construction, UAH thousands;
S is the duration of motor road operation starting from the date of commissioning until the expiry of the concession agreement, months;
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Kb is a factor determined considering the motor road commissioning time specified in the concession agreement;
E is the adjusted standard of annual financial costs of small current repairs and operational maintenance of 1 km of the motor road approved according to the procedure prescribed by the law, UAH thousands;
D is the length of the commissioned motor road, kilometers;
Ke is a factor determined considering the requirements to the operational availability and quality of the motor road specified in the concession agreement; and
Ii is the price index of construction and installation operations by building and structure type.
The operational availability fee may be adjusted in case of change of the variables of the approved formula.
Does the law clearly define which government agencies may provide financial or economic support in the course of project implementation (if necessary), and what kind of support can they provide? In particular, which subsidies for construction and operational payments are provided for, and on what terms?
The Law “On Concessions” mentions the “participation of the state and local self- governance bodies in the partial funding of concession properties of social importance” as one of the main principles of concession activities.
The Law “On Concessions for Construction and Operation of Motor Roads” states that the concessor may partly fund (co-finance) the construction and/or operation of motor roads on the terms of concession within the amounts and according to the procedure specified in the concession agreement at the expense of funds allocated in the special fund of the state budget for development of the network and maintenance of public motor roads (see section 5.3.1 of the Report).
Among the sources of the concessionaire’s income from the operation of the road, the law indicates, in particular, allowances and/or compensations provided by the concessor (the sources of the concessionaire’s income are described in section 5.9.1 of the Report). The law does not specify clear criteria for provision of such allowances or compensations. Other sources of the concessionaire’s income are determined by the concessor based on the feasibility study and/or design and budget documents, and are indicated in the bidding documents and the concession agreement.
According to the Law “On Concessions”, the concessor may provide the concessionaires of unprofitable and low-profit concession properties of high social importance with benefits related to concession payments, in particular in the form of payment by installments, deferred payment, full or partial exemption from the concession payments for a certain period of time, as well as stipulate the provision of allowances, compensations, or benefits. The procedure for identification of such properties, as well as the terms of provision of allowances, compensations, and benefits, was approved by the Resolution of the Cabinet of Ministers of Ukraine of July 13, 2000, No. 1114.
According to section 7 of the said procedure, the benefits related to concession payments may be provided to concessionaires in case if, over the last reporting year before the execution of the concession agreement, the operation of the concession property of high social importance produced loss or the profitability ratio (income to cost ratio) was lower than 25% of the (sub)industry average.
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Benefits related to concession payments may be provided, in particular, on the following conditions: - if the amount of loss from the operation of the concession property exceeds the amount of annual concession payment, the concessionaire is granted a deferment of concession payments for a period of up to 2 years;
- if the amount of loss from the operation of the concession property is less than the amount of annual concession payment, the concessionaire is granted a deferment of concession payments for a period of up to 1 year;
- if the amount of income received by the concessionaire from the operation of the concession property after taxes and other mandatory payments is lower than the amount of annual concession payments, the concessionaire shall pay 50% of the concession payments with a deferment of the remaining payments for a period up to 2 years;
- if the amount of income received by the concessionaire from the operation of the concession property after taxes and other mandatory payments is lower than the amount of annual concession payments, the concessionaire shall pay 50% of the concession payments with a deferment of the remaining payments for a period up to 1 year.
According to the terms of the concession agreement, the concessionaires may receive other benefits. In specific cases, taking into account the national interests or interests of the region in providing the consumers with a maximum amount of goods (works, services), benefits in relation to concession payments, allowances, and compensations may be granted to concessionaires on newly created low-profit concession properties. Such a wide definition under certain conditions could be applied to the Project as well.
Moreover, the possibility of state support is also provided for in article 18 of the Law “On Public-Private Partnership”. According to the procedure of provision of such support approved by the Resolution of the Cabinet of Ministers of Ukraine of March 17, 2011 No. 279, state support may be provided:
- by providing state and local guarantees;
- by funding activities (programs) at the expense of the state or local budgets and other sources according to the national and local programs; and
- in other form according to the law. The criteria and conditions for provision of state support and establishment of its form and amount are approved by the Ministry of Economic Development and Trade of Ukraine upon approval by the Ministry of Finances of Ukraine.
Does the law provide for tax discounts for an organization engaged in the project and performing the implementation (in particular for the concessionaire)? Is the procedure of provision of subsidies and tax discounts sufficiently transparent and easy to comply with?
According to the Law “On Concessions”, the depreciation of a property granted under a concession has to be accounted for by the concessor or a body authorized by it. The concessionaire is notified about the amount of depreciation deductions on a quarterly basis within the period specified in the concession agreement. The concession payment to be made by the concessionaire for the respective period is reduced by the amount of
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depreciation deductions accrued (but not more than in the amount of the concession payment).
The concessionaire must perform the operations approved by the concessor for improvement of the concession property for the amount of accrued depreciation deductions by which the concession payment was reduced, according to the procedure and within the period specified in the concession agreement.
In practice, the application of the concession payment reduction mechanism may be complicated due to the fact that according to the Law “On Concessions”, the depreciation of a property granted under a concession has to be accounted for by the concessor or a body authorized by it, whereas the property itself is on the books of the concessionaire.
Section 153.7 of the Tax Code of Ukraine specifies that receiving property under concession does not change the tax obligations of the concessionaire. At the same time, the concessionaire increases the amount of costs by the amount of the accrued concession payment based on the results of the tax period in which such payment is accrued. The law does not provide for a special tax treatment for a concessionaire.
Does the law allow the responsible organization (including, if necessary, the concessionaire) to engage and structure the funding required for implementation of the project?
Yes. The procedure of funding and its structuring, in particular the financial model, are determined by the concessionaire and the concessor in the concession agreement and other agreements on the specific project.
According to the Law “On Public-Private Partnership”, the funding of a public-private partnership, in particular in the form of concession, may be performed using: financial resources of the private partner; financial resources borrowed according to the prescribed procedure; funds of the state and local budgets; or other sources not prohibited by law.
The Resolution of the Cabinet of Ministers of Ukraine No. 640 specifies that implementation of the Project is performed using the funds of private investors, as well as the state budget funds according to the law.
Does the law allow an organization to provide the required collateral against the project assets in order to secure such funding?
The law does not prohibit an organization to provide the required collateral against the project assets in order to secure such funding. However, according to the law, the concessionaire only owns the property located outside the motor road right-of-way area, which does not have a significant commercial value within the project. Thus it is unlikely that sufficient funding will be provided with such collateral only. See also section 5.3.7 of the Report.
Does the law specify any restrictions regarding the provision of collateral against any state assets included with the concession? Does this affect the capability of the concessionaire to finance the project?
The law imperatively states that the property established in pursuance of the terms of the concession agreement or received under the concession and placed within the right- of-way of the motor roads is state-owned property transferred to the concessionaire for use during the effective period of the concession agreement. Therefore, the main project 22 / 81
assets, namely the public motor road and the respective land plots covered by the road, are state-owned property and cannot be privatized (see section 5.7.1 of the Report), and thus cannot be fully used as a collateral for the funding of the project.
Does the law provide for emergence of the respective rights of the borrowers to “step in” the project, in particular: rights to direct the concessionaire’s activities? right for foreclosure on the pledged shares and restructuring of the project company? right to use companies as an alternative/replacement of the project company? right to transfer the concession to a new organization?
The law does not provide for such rights of the borrowers, although it does not restrict the possibility of providing for the respective rights of “stepping into” the project in the concession agreement and other project agreement. The respective provisions may also be included in the approximate concession agreement.
5.4. Project Agreement
5.4.1. Does the law provide for a sufficient area of application and flexibility for the parties to be able to negotiate the contents of a project agreement which would best suit the project needs?
The Law “On Concessions” specifies the material terms which must be defined in the concession agreement:
- parties to the agreement;
- types of activity, work, service provided according to the terms of the agreement;
- concession property (content an value of the property or technical and financial conditions for creation of the concession property);
- terms for allotment of the land plot, if necessary for the concession activity;
- list of activity types which require licensing;
- terms of setting and modifying the prices (rates) for the goods (works, services) produced (provided) by the concessionaire;
- effective period of the concession agreement, terms of recruitment and use of the labor of Ukrainian citizens;
- terms of use of domestic materials;
- terms and amounts of improvement of the concession facility and the procedure for reimbursement of the said improvements;
- terms, amount, and procedure of concession payments;
- procedure of use of depreciation deductions;
- restoration of the concession property and conditions for return thereof;
- liability for a failure to perform or improper performance of obligations that follow from the concession agreement;
- concessionaire’s insurance of the property received under the concession;
- procedure of amendment and termination of the agreement;
- procedure for resolution of disputes between the parties;
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- right to receive information and check the agreement performance;
- procedure and terms of transfer of the rights and obligations that follow from the concession agreement, in particular with provision of guarantees to the creditors; and
- procedure of use of intellectual property.
According to the provisions of Article 10 of the Law “On Concessions”, upon agreement of the parties the concession agreement may include other terms, in particular those provided for by special laws on concession activity in specific areas of business.. Moreover, article 6 of the Civil Code of Ukraine allows deviating from some provisions of the law which are not imperative according to the law.
The Resolution of the Cabinet of Ministers of Ukraine of October 04, 2000, No. 1519, approved the standard concession agreement for construction and operation of a motor road, which includes detailed provisions of a concession agreement. According to the Economic Code of Ukraine (part 4, article 179), the parties are not allowed to deviate from the terms of standard agreements approved by the Cabinet of Ministers of Ukraine, but allows making their provisions more specific. The legal position according to which the parties may not deviate from the content of the standard concession agreement is reinforced by the practice of the Higher Economic Court of Ukraine1.In order to avoid the risk of appeal against the concession agreement for construction and operation of the motor roads, it is recommended to take into consideration the provisions of the standard concession agreement when entering into such agreement.
The proposals on the respective amendments to the law are provided in Section 6 of the Report.
5.4.2. What contract execution strategies and the related ways of risk distribution are allowed by the law and are acceptable?
According to the law, the property created in pursuance of the terms of the concession agreement is either state-owned or municipal property. According to the concession agreement, the concessionaire receives the right to hold and operate the road as a concession property. Upon expiry of the concession agreement, the road is transferred to the state.
The terms described above correspond to the generally accepted ВОТ (Build – Operate – Transfer) model, under which the concessionaire performs the construction and operation during the specified period, after which the property is transferred to the state. Additionally to the construction and operation, the concessionaire is expected to perform the design of the road, which correspond to the DBOT (Design – Build – Operate – Transfer) model. It should be mentioned that the law does not provide an opportunity for the concessionaire to take part in the development of the design documents (see section 5.1 of the Report). It is proposed to eliminate this gap by making appropriate amendments to the laws regulating concessions as indicated in Section 6 of the Report.
1 Texts of the rulings of the Higher Economic Court of Ukraine of June 22, 2010, in cases No. 10/454/09 and 15/201/09, stipulating the legal standpoint described, are available at: http://www.reyestr.court.gov.ua/Review/10275432; http://www.reyestr.court.gov.ua/Review/10275430.
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The project may acquire the signs of DFBOT (Design – Finance – Build – Operate – Transfer). According to such model, the concessionaire is also responsible for the funding of the project.
The classification of risks related to public-private partnership is specified in the Technique for Identification, Evaluation, Type Recognition, and Management of Risks Related to Public-Private Partnership, approved by the Cabinet of Ministers of Ukraine Resolution No. 232 of February 16, 2011 (hereinafter referred to as the “Risk Identification Technique”). The Risk Identification Technique identifies the following groups of risks: (1) risks related to the influence of external circumstances beyond the partners’ control; (2) political risks; (3) risks related to the partners’ failure to comply with the contractual terms; (4) commercial risks; (5) financial risks; and (6) environmental risks.
Considering the absence of a paid road network in Ukraine, the issue of traffic on the newly constructed road is highly important in the context of construction of new roads on the terms of concession. Potential concessionaires are often ready to take part in concession projects only on condition that the risk of insufficient traffic will be assumed by the concessor and, depending on the financial model, will reimburse the concessionaire for the losses caused by insufficient traffic. It is reasonable to supplement the laws with a provision allowing the concessionaires of unprofitable or low-profit motor roads to be given reimbursement of losses due to low intensity of traffic on such motor roads. The respective legislative amendments are specified in Section 6 of the Report.
The standard concession agreement for construction and operation of a motor road places the liability for the risks related to construction, operation, and lease of a motor road, including the risks related to ensuring the traffic safety. In particular, the standard concession agreement stipulates that the concessionaire shall bear the risk of accidental destruction of, or damage to, the motor road. At the same time, the Law “On Concessions” vests the risk of accidental loss or damage of the concession property with the concessor, unless specified otherwise in the concession agreement.
The abovementioned provisions of the standard concession agreement significantly restrict the capability of the parties to freely distribute the risks, considering the parties’ obligation to observe the provisions of the standard agreement as specified in section 5.4.1 above.
5.4.3. Does the law provide for other (unjustified) restrictions of the right of the parties to negotiate other fundamental provisions of the project agreement?
As specified in section 5.4.1 above, according to article 10 of the Law “On Concessions”, in addition to the material terms, the parties to a concession agreement may agree on other terms of such agreement. However, the provisions of article 179, part 4, paragraph 4, of the Economic Code of Ukraine prohibit the parties to deviate from the provisions of the standard concession agreement approved by the Cabinet of Ministers of Ukraine. Instead, the parties are only allowed to make the provisions of the Standard Concession Agreement more specific. We are aware of certain court judgments (see section 5.4.1 of the Report) in which the court invalidated provisions of a concession agreement because they were not provided for by the respective standard agreement and were not directly specified in the law.
5.4.4. Does the law contain clear requirements regarding the time frame and the procedure of preparation, negotiation, signature, and approval of the project
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agreement? Does the procedure allow rational use of time and is it easy to comply with? Does the law contain a clear definition of the government agency authorized to prepare, negotiate, and sign the project agreement?
According to the Procedure of Concession Bidding (section 5.2.1 of the Report), within five days after the winning bidder is determined, the bidding committee, on instruction from the concessor, must send the winning bidder a notification and an invitation for negotiations for approval of the final version of the concession agreement and signature thereof.
According to the Law “On Concessions”, the information about the results of the concession bidding shall be published in the “Uriadovyi kurier” or “Holos Ukrainy” newspapers or in the printed media of the respective local self-governance body within ten days after the decision about the winning bidder is announced. The concession agreement shall be signed with the winning bidder not later than three months after the bidding results are published. Based on a written request from the winning bidder, this time can be extended.
The procedure of the concession bidding (section 5.2.1 of the Report) specifies that the concession agreement shall be signed by the concessor and the winning bidder within one week after the approval of the draft concession agreement.
The provisions provided above specify clear time limits and facilitate rational use of time during the execution of a concession agreement.
The procedure of preparation and negotiation of a concession agreement is not clearly regulated. According to the Law “On Concessions for Construction and Operation of Motor Roads”, the resolution to perform the construction and/or operation of motor roads on the terms of concession is made by the Cabinet of Ministers of Ukraine based on a feasibility study. According to the said law, the concessor authorized to enter into a concession agreement is the state as represented by the Cabinet of Ministers of Ukraine or an executive government body authorized by the Cabinet of Ministers of Ukraine to hold the concession bidding, execution of a concession agreement, and performance of the obligations stipulated in it. For the CRR, such authorized agency is the State Agency for Investment and National Projects (see section 5.1 of the Report).
The concession agreement does not require approval by a competent authority upon the signature, however, it requires registration with a notification to the State Property Fund of Ukraine (see section 5.4.6 of the Report).
5.4.5. Does the law provide for other (unjustified) restrictions of the right of the parties to amend the project agreement at later stages of project implementation? How does the law guarantee that the right to renegotiate the provisions of the project agreement at later stages does not affect the fairness of the selection procedure?
The current law stipulates the general rule that the provisions of an agreement may be amended based upon agreement of the parties or through a court procedure. The special laws regulating the relations of concession for construction and operation of roads do not contain a prohibition of amendments to concession agreements after they are executed. In particular, article 9 of the Law “On Concessions” directly stipulates the right of the parties to modify the duration of the concession agreement within the time limits specified in the same Law (10 to 50 years) upon agreement between the parties. Moreover, section 56 of the standard concession agreement for construction and operation of a motor road specifies that “in case of circumstances that require the terms
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of this agreement to be amended, a party must notify the other party in writing /?/ days in advance. In such case, a supplementary agreement about amendment of the terms of such agreement is made, signed by the concessor and the concessionaire, and becoming an indispensable part of this agreement”.
At the same time, according to the procedure of the concession bidding (see section 5.2.1 of the Report), after the winner of the concession bidding is determined and before the respective concession agreement is executed, the parties may agree to make amendments and additions to the draft concession agreement to the extent not related to material terms specified in the bidding documents and in the winning bidder’s bid. Such approach may be expanded to apply to the cases of amendment of the concession agreement after it is signed. Therefore, the parties to a concession agreement may agree to amend it, however, such amendments may not affect the material terms of the agreement specified in the bidding documents and in the winning bidder’s bid. However, the law does not directly stipulate this approach. Moreover, considering the provisions of Article 179, part 4, of the Economic Code of Ukraine, and the existing judicial practice (see section 5.4.1 of the Report), when amendments are made to the concession agreement, it is not recommended to deviate from the provisions of the Standard Concession Agreement for Construction and Operation of a Motor Road.
Another guarantee against abusive practices is the provision of article 14 of the Law “On Concessions”, according to which concession agreements are subject to mandatory registration. According to the Resolution of the Cabinet of Ministers of Ukraine of January 18, 2000 No. 72 “On the Registry of Concession Agreements”, in case of change in the details entered into the registry of concession agreements, the concessor shall submit the respective information to the State Property Fund, a note whereof is made in the respective registry (see section 5.4.6 of the Report).
5.4.6. Does the law provide a proper agreement management mechanism? In particular, which government agency is responsible for control and supervision of performance of the project agreement?
According to article 14 of the Law “On Concessions”, according to which concession agreements are subject to mandatory registration. According to the Resolution of the Cabinet of Ministers of Ukraine of January 18, 2000 No. 72 “On the Registry of Concession Agreements”, the respective registry is introduced for the purpose of registration of concession agreements between concessionaires and executive government agencies of local self-governance bodies authorized to enter into concession agreements. The registry is maintained by the State Property Fund.
According to article 17 of the Law “On Concessions”, the right to supervise the concessionaire’s compliance with the terms of the concession agreement belongs to the concessor.
Additionally, the authority to supervise certain aspects of the concessionaire’s activity performed in connection with the execution of the concession agreement, is vested with the authorized supervisory bodies.
For instance, the Law “On Motor Roads” gives the State Agency for Motor Roads of Ukraine some authority for supervision in the area of the road system, in particular supervision of compliance with the environment protection laws, road condition and safety, traffic conditions, and fees charged for travel on public motor roads. The state agency responsible for the management of public motor roads annually verifies the conformity of the condition and use of a paid road with the requirements and makes
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proposals to hold the persons responsible for violation of road maintenance rules and standards liable.
The architecture and construction supervision of compliance with the regulations, rules, and standards for construction of roads is exercised by the State Architecture and Construction Inspectorate of Ukraine and its territorial bodies.
The supervision authority also belongs to the agencies performing civil defense supervision of adherence to, and compliance with, the provisions of the law in the areas of technogenic and fire safety, internal affairs agencies, land use and protection supervision agencies, nature protection agencies, etc.
5.4.7. Does the law provide for supervision mechanisms for the activity of an organization performing implementation under an agreement, in particular as related to the timeline of performance, conformity with the construction, environment protection, service, and other standards? Does the law provide for the possibility to reduce the availability payments by a state agency or other sanctions due to the quality of work of the organization performing implementation?
The law gives the competent government agencies the authority to supervise the concessionaire’s activity (see Section 5.4.6 of the Report).
The current law provides for the possibility of reducing availability payments in case of the concessionaire’s failure to comply with the terms of the concession agreement. For instance, under the Procedure for Calculation of Payment for Operational Availability of a Motor Road Constructed on the Terms of Concession approved by the Resolution of the Cabinet of Ministers of Ukraine of July 11, 2013, No. 493, the amount of payment for the operational availability of a motor roads paid by the concessor is calculated using a formula which includes the following coefficients:
- Ke coefficient: determined taking into account the motor road operational availability and quality requirements specified in the concession agreement;
- Kb coefficient: determined taking into account the time of commissioning of the motor road specified in the concession agreement.
Therefore, the amount of operational availability payment will be reduced proportionally in case the above coefficients change.
As specified in article 15 of the Law “On Concessions”, in case of one of the parties’ failure to fulfill its obligations under a concession agreement, such agreement may be terminated through a court procedure before it expires.
According to the general provisions of the Civil Code of Ukraine, each of the parties to the concession agreement must reimburse the other party for the damage inflicted in connection with the failure to perform, or improper performance of, its obligations under such agreement. Moreover, the person operating the motor roads may be required to reimburse the users for the material losses resulting from a traffic accident caused by improper road condition or safety. The Law “On Concessions” requires the concessionaire to reimburse the concessor for the losses resulting from destruction or deterioration of the motor road, unless the concessionaire proves that such destruction or deterioration were not through his or her fault.
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The current law also provides for administrative and criminal liability for violation of construction regulations and standards. For instance, the Law “On Liability for Offenses in Urban Planning” and the Administrative Offenses Code of Ukraine prescribe administrative liability in the form of fines for violation of construction regulations, state standards, and rules. Article 275 of the Criminal Code of Ukraine establishes criminal liability for officials guilty of violating the rules related to safe operation of buildings and structures in the course of design or construction in the form of a fine, corrective labor, arrest, or imprisonment with prohibition to hold certain positions or engage in a certain activity for a certain time. There is also liability for the damage to environment and other violations.
5.4.8. Does the law specify the (maximum) duration of a project agreement?
According to article 9 of the Law “On Concessions”, the concession agreement is effective for the period specified in the agreement, which cannot be shorter than 10 years or longer than 50 years. Therefore, the minimum duration of a concession agreement is 10 years, and the maximum duration is 50 years.
5.4.9. Does the agency signing the agreement have enough flexibility to negotiate the required duration?
Considering the provisions of article 9 of the Law “On Concessions”, the duration of a concession agreement may be 10 to 50 years depending on the arrangement between the parties (see section 5.4.8 of the Report). Additionally, according to the same article, the parties may agree to modify the duration of the concession agreement within the time limits specified above.
At the same time, the bidding procedure (section 5.2.1 of the Report) requires the duration for which the concession is granted to be specified along with other material details in the bidding announcement. This appears to be reasonable, since the duration of the concession has significant influence on the financial model to be developed by the concessionaire. Considering the approach presented in section 5.4.5 of the Report, after the bidding procedure is announced (with announcement of the concession duration), the change of the concession duration may theoretically be found to be an infringement of rights of other applicants.
5.4.10. Does the law contain any (unjustified) restrictions regarding the right of the responsible organization for negotiation of the terms of various agreements within the project or other agreements with the third parties required for implementation of the project (for example, agreements for construction/operation and maintenance, shareholding/direct agreements)? For example, are there (unjustified) requirements regarding the government approval, application of local directives, etc.?
Article 18 of the Law “On Concessions” provides for the concessionaire’s right to engage third parties for special activities at the concession property on a contractual basis.
However, in such case the concessionaire is liable for such parties’ compliance with the concession agreement and the Ukrainian law.
It should also be kept in mind that the law allows the concessionaire to fully or partially transfer its property rights under the concession agreement or the concession properties to the third parties only on condition of the concessor’s approval.
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The parties may make a provision in the concession agreement to require the concessionaire to secure the concessor’s approval for key contractors and key agreements executed in performance of the main agreement, or specify a different procedure for selection of all or key counterparties and negotiation of agreement terms by the concessor or another entity independent of the concessionaire.
5.5. Land Issues
5.5.1. Legal Status of a Land Resources User in Concession Projects
The concessionaire acquires the right for construction of a motor road based on a concession agreement from the moment it acquires the right to use the land plots allocated for the construction of the motor road.
The Land Code of Ukraine specifies that the concessionaire acquires the rights to land plots on the terms of lease. Lease is a paid agreement involving monthly payment for the use of the land plot. The lease is entered for a period specified in the concession agreement for performance of the PPP project, but not less than 5 and not more than 50 years.
The lessee may use the land plot exclusively for its designated purpose.
In case the authorized agency (the Cabinet of Ministers of Ukraine) makes a decision to perform public-private partnership (PPP), the surveying projects for allocation of land plots and other surveying documents which, according to the law, is required to provide a land plot for use, as well as the documents regarding the land plots required for the private partner to perform such partnership, shall be developed on the order of the public partner (the State Agency for Investment and National Projects).
The State Agency for Investment and National Projects must secure the approval of the surveying documents with the respective state agencies or local self-governance bodies according to the procedure specified by law, and, in the cases specified by law, to receive a positive opinion of the state surveying expert service according to the procedure specified by law.
The documented costs of the public partner and/or the person who filed the request for performance of the public-private partnership for development (preparation) of surveying documents and expert assessment thereof, shall be reimbursed by the private partner according to the terms of the agreement made within a public-private partnership.
The procedure and conditions for the private partner’s acquisition of rights to use land plots are specified in the terms of the bidding for selection of the private partner for execution of a public-private partnership agreement (concession agreement).
After the PPP agreement expires, the private partner must vacate the land plot provided to it for performance of the PPP.
5.5.2. Ways of acquisition of rights for land plots
The Land Code of Ukraine specifies only one way for the concessionaire to acquire the rights to land plots, which is provision of land plots to the concessionaire on the terms of lease. The right to use the land plots for concession activity is not granted on a competitive basis.
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After entering into a concession agreement and in pursuance of such agreement, the concessionaire and the owner execute a land plot lease agreement. Since the State Agency for Investment and National Projects is the concessor and not the owner of the land plots, the decision of the land plot owners (government agencies and local self- governance bodies) is also required in order to enter into the lease agreements.
The lease agreement is notarized, with the notary registering the concessionaire’s right of lease in the State Registry of Property Rights to Real Estate. The right of lease emerges from the moment of such registration.
5.5.3. Expropriation of land plots from private property as a prerequisite for the concessionaire’s acquisition of rights to the land plot
For the purposes of construction and operation of the CRR, the land plots located within the planned CRR placement territory have to be transferred into state or municipal ownership. For this, the private ownership of such land plots by individuals and legal entities has to be terminated.
The current law provides for the following possible ways to terminate private ownership of land and transfer it to state/municipal ownership, which potentially may be used for the purposes of CRR construction and operation:
- land plot buyout for money for social needs;
- land plot buyout in exchange for another equivalent land plot for social needs; and
- alienation of a land plot on the grounds of social necessity.
The buyout procedure is regulated by the Law of Ukraine “On Alienation of Privately Owned Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Necessity” of November 17, 2009 No. 1559-VI. In the following paragraphs, we will look into the procedure using the example of expropriation of land plots which (from the point of view of the specified competent authorities) are located outside of Kyiv in the territory of Kyiv Oblast (especially on the left bank of the Dnieper River). As regards the implementation of this procedure in the territory of Kyiv (in particular on the right bank of the Dnieper River), it will be performed in a similar way with other competent authorities (in particular with participation of Kyiv City State Administration). The procedure is as follows:
1) The State Agency for Investment and National Projects contacts the owners and users of land plots for notarized consent for expropriation of the land plots.
2) The State Agency for Investment and National Projects ensures the approval of the placement of the CRR according to the procedure specified in article 151 of the Land Code of Ukraine, namely as follows:
- The State Agency for Investment and National Projects contacts the Kyiv Oblast State Administration with an adequately supported application for selection of location of land plots due to the buyout of privately owned land plots on the grounds of social needs (for the construction of the CRR).
- Within one week, the Kyiv Oblast State Administration shall direct the application for review by the Central Administration of the State Land Agency in Kyiv Oblast and the Urban Planning and Architecture Department of Kyiv Oblast State Administration. In case the land plots are located within populated 31 / 81
areas, the respective applications shall be sent for review by the local self- governance bodies as well (village, settlement, or city councils).
- Within ten days, the aforementioned agencies shall provide Kyiv Oblast State Administration with conclusions about the possibility of allocation of land plots for construction of the CRR.
- Within two weeks, the Kyiv Oblast State Administration shall review the land plot selection materials and make the decision for approval of the said materials, thereby giving the permission to develop the land plot allocation project.
3) The State Agency for Investment and National Projects shall develop, and secure the approvals for, the land plot allocation project through the following stages:
- The State Agency for Investment and National Projects shall develop and approve the order for development of a land plot allocation project and order the development of the land plot allocation project from a legal entity or individual who holds a license for surveying operations;
- The State Agency for Investment and National Projects or the design works contractor shall secure the approval for the project by the Central Administration of the State Land Agency in Kyiv Oblast and Urban Planning and Architecture Department of Kyiv Oblast State Administration.
- The projects for allocation of land plots belonging to especially valuable land requires approval by the Verkhovna Rada of Ukraine. The projects for allocation of land plots in the nature reserve and other nature protection, historical, cultural, or forestry areas require approval by the Cabinet of Ministers of Ukraine.
- The State Agency for Investment and National Projects shall submit the projects for allocation of land plots of especially valuable land, forestry land, or the land of water reserve, nature reserve, health improvement, recreational, historical, or cultural value to the Central Administration of the State Land Agency in Kyiv Oblast for mandatory state expert assessment.
- The State Agency for Investment and National Projects shall ensure the establishment of the buyout price for the land plots and real properties and perennial plantings located on such land plots.
4) The State Agency for Investment and National Projects shall provide the land plots placement approval materials and the approved land plot allocation project, along with the positive conclusion of the state surveying assessment, to the Kyiv Oblast State Administration, which shall, within two weeks, adopt the resolution for buyout of land plots and other real property located on them for social needs, and notify the owners about the decision made.
5) The owners of land plots and other real property located thereon shall give their consent for, or refusal from, such buyout within one month.
6) The representatives of the Kyiv Oblast State Administration shall negotiate with the owners, users, pledge holders, etc., of the land plot or other real property located thereon regarding the buyout price, time period, and other terms of buyout or exchange.
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7) The Kyiv Oblast State Administration shall determine the appraisers authorized for expert valuation of land plots and real properties located thereon. The reports on expert valuation shall be reviewed by the appraisers for expert valuation of land plots and state expert assessment by the Central Administration of Land Resources in Kyiv Oblast. When establishing the buyout price of a land plot, the buyout price shall include the value of the land plots and real property located thereon, as well as costs incurred by the owners due to the early termination of their obligations to third parties. If the owner does not agree with the valuation performed by the appraiser, the owner may, at his or her own expense, engage another appraiser in order to establish the value of the real property or review the valuation report for such property.
8) In case agreement is reached with the owner about the execution of a land plots purchase and sale agreement, the State Agency for Investment and National Projects shall ensure that an amount of money that equals the buyout price and an amount of money required to reimburse the costs of tearing down the real property is credited to the account of the Kyiv Oblast State Administration.
9) The Kyiv Oblast State Administration shall execute the contract of purchase and sale and arrange for notarization and state registration thereof with the State Registry of Legal Transactions. If during one week after the decision for buyout of the land plot and other real property located thereon for social needs (і) the contract of purchase and sale is not executed with the owner; or (іі) the representatives of Kyiv Oblast State Administration fail to recourse to court for expropriation of such property, or (ііі) the court resolves to refuse the claim and the resolution enters into force, the respective resolution of the Kyiv Oblast State Administration for buyout of the land plot and other real property located thereon shall become void.
10) The Kyiv Oblast State Administration shall perform the payments under the contract of purchase and sale in monetary form using the funds received from the State Agency for Investment and National Projects.
11) Teardown of the real property that has been bought out shall be ensured by the Kyiv Oblast State Administration according to the procedure specified in the Resolution of the Cabinet of Ministers of Ukraine of November 8, 2007, No. 1314 “On Approval of the Procedure for Write-Off of State Property”.
Buyout is possible only subject to the consent of the owner and only on condition of notice about the future buyout being made at least three months before the planned future buyout. In case of the owner’s refusal to perform the buyout, the government agencies/local self-governance bodies shall have only one year to recourse to court for expropriation of the land plot or other real property located thereon. The buyout is a cost intensive operation, as it has to be performed at the buyout price established based on the expert valuation and accounting for all losses, including lost profit, incurred by the owners due to the buyout of the land plot for social needs.
The algorithm of actions in case of exchange of privately owned land plots for equal municipally owned land plots is not explained in the Law “On Alienation of Privately Owned Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Needs”, and therefore has to be the target of adjustment of regulations to make the Law more detailed.
The list of social needs which may constitute grounds for expropriation are specified in article 146 of the Land Code of Ukraine, which, in particular, includes such grounds as construction and maintenance of infrastructure lines and facilities of the transportation and energy infrastructure (roads, gas pipelines, water lines, power lines, airports, oil and 33 / 81
gas terminals, power stations, etc.) Thus the construction of the CRR meets the legal definition of social needs, and therefore may constitute grounds for expropriation of land plots from the land users for social needs.
In the absence of the written consent of the land user for expropriation of the land plots, the land plot shall be expropriated based on the resolution for temporary expropriation of the land plot. In such case, based on the provisions of article 149, part 10, of the Land Code of Ukraine, if the land user does not agree with the expropriation of the land plot, the issue shall be submitted to court.
The procedure of expropriation of land plots consists of the following stages:
1) The Kyiv Oblast State Administration files a claim for expropriation of the land plot and property located on it with the administrative court (at the location of the defendant). In addition to the statement of claim, the Kyiv Oblast State Administration must provide the documents confirming technical impossibility to build the CRR without termination of ownership rights for the aforementioned land plots and real property.
2) The administrative court shall review the stated claims and, should it allow the claim, establish the buyout price and the procedure for payment of such price, as well as the list and procedure of providing property to replace the alienated property. Simultaneously with the satisfaction of the stated claims for expropriation, the court may allow the claims for teardown of the real property located on the land plot being alienated.
3) The Kyiv Oblast State Administration shall arrange full preliminary reimbursement of the value of the land plot and real property located on it in monetary form by wire transfer to the owner’s account or by depositing the funds at a notary’s office at the location of the land plot. This actions shall be taken before the respective court of appeals makes its resolution.
4) The State Registration Service shall perform the state registration of the state or municipal ownership of the land plot or other real property items located thereon which have been bought out on the grounds of a court judgment.
Expropriation shall be performed only on condition of advance payment and on condition of completion of all stages of the land plot buy-out procedure.
The expropriation process may be delayed by appeals against the court ruling about the expropriation in a superior court.
Permanent Land Use
The current legislation of Ukraine provides for the withdrawal of land from the permanent land users for social and other purposes without any compensation to the latter. This can be effected by the decision of central and local government authorities subject to consent of the land-users.
According to Art. 149, Part 1 of the Land Code, public or municipal property (land) granted for continuous use can be withdrawn for social and other purposes following the decision of central and local government authorities.
In other words, this rule clearly stipulates that the official paper confirming the intention of a central or local authority to withdraw land from the owner or a land-user is the decision of such an authority.
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This decision shall be taken by a central or local government authority vested with such powers in accordance with applicable law.
If there is a land-user’s consent for withdrawal of land, the relevant authority shall decide to withdraw it. The land-user’s consent shall be made in writing and notarized.
Termination of Long Term Land Lease
If the land located within the CRR construction easement boundaries has been leased with the expiry date falling beyond the scheduled date of CRR construction commencement, the lease contract shall be terminated on the grounds specified in the contract or in the law. For the purposes of CRR construction and in accordance with Art. 31 of the Law On Land Lease, termination of lease contract shall be possible based on the following reasons:
Buy-out of land for public use or expropriation of private property (land) for public good; Termination of contract by mutual consent; Termination by the court in case of a substantial breach of contract; Unilateral termination if provided for in the lease agreement.
5.5.4. Withdrawal of Land from the Special Nature Reserves
Special Nature Reserves (SNR) shall be established without withdrawal of land, water and other natural facilities from their owners or users. Activities that do not conflict with the aims and objectives of the SNR shall be carried out according to the general environmental protection requirements. The objectives, research profile, the nature and the mode of operation of the SNR shall be identified in the TORs in accordance with Art. 5 of the Law On the Nature Reserve Fund of Ukraine. In accordance with the national building codes (Section 10.4, DBN 360-92**) the SNR lands shall not be used for constructing buildings, structures and communication lines. This corresponds to Art. 40, Part 2 of the Law On the Nature Reserve Fund of Ukraine. According to this Law, the protected zones cannot be used for construction of industrial and other facilities. Should the type of incorporation change in terms of the land hosting the reserves, the landlords are required to provide for their protection and preservation followed by a relevant official extension of their security commitments. Thus, for the purposes of construction it is required to withdraw land from the reserve and remove land from the current landlords and land-users.
Parts 3 and 4 of Art. 5 of the Law On the Nature Reserve Fund of Ukraine do not include provision of a corporate status to the SNR. Article 12 does not provide for the Establishment of SNR administration. According to Part 5 of the same Article, management of the areas and facilities of the natural reserve fund lacking special administration authorities shall be carried out by the enterprises, institutions and organizations in charge of these areas and facilities.
It is assumed that a portion of the CRR will pass through the Zhukiv Ostriv SNR. Zhukiv Ostriv is a landscape reserve of local significance and it was established by the resolution of the Kyiv City Council No. 147/649 on December 2, 1999. Property description: "The woodland yet retains exceptional wealth of animal and plant life, valuable spawning areas and pristine meadows." The SNR limits have been approved by the Kyiv City Council on August 22, 2007, Reg. No. 162/1996. This landscape reserve is a part of the Nature Reserve Fund.
Establishment of a reserve was effected in violation of the procedure set forth in Art. 52 of the Law. It has been done in the absence of a prior approval of the State Environmental Protection Department
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in Kyiv. However, after consideration of this issue, the courts have concluded that this violation is formal and does not affect the legitimacy of the resolution to establish a reserve.
The TORs of the Zhukiv Ostriv local significance landscape reserve were approved in 2003 by the Head of the State Department of Environment and Natural Resources in Kyiv and agreed with both Kyivzelenbud CEO and the director of Holosiyivsky regional landscape park. According to the information received from the environmental NGOs, Paragraph 3.1 of the Zhukiv Ostriv TORs implied that construction, reclamation and any other work that may lead to hydrological changes are prohibited on its territory.
Kyiv City State Administration adopted Resolution No. 30/87 on September 28, 2006 to establish a municipal company - Zhukiv Ostriv aiming "to preserve integrity, improvement and development of Zhukiv Ostriv environment, its protection and creation of recreation conditions for the residents". Later, the resolution was abolished by Kyiv City Council on October 27, 2011, Reg. No. 393/6609, because the company has neither been established nor incorporated in the prescribed manner and its establishment was not economically feasible. In this regard, it should be concluded that Zhukiv Ostriv reserve is still run by Kyiv City Council.
According to preliminary data, the CRR will also pass through the territories that now belong to the reserves of national significance within Kyiv. According to Art. 5, Part 1 of the Law On the Nature Reserve Fund, the objectives, research profile, the nature and the mode of operation of the territories and facilities of the national nature reserve shall be determined by the TORs approved by the Ministry of Environmental Protection.
Starting a construction project requires abolishing the status of natural reserve fund for the construction area. According to Article 54 of the Law On the Nature Reserve Fund, reserve boundaries can be changed in a manner similar to establishing a reserve simply by changing its boundaries in consultation with the Ministry of Environment and the Natural Resources of Ukraine based on the appropriate expert opinion. According to Article 54 and 53 hereto, the resolution to change the boundaries of Zhukiv Ostriv local reserve shall be adopted by the Kyiv City Council and for the national reserves – by the President of Ukraine. In accordance with Articles 51 -53 of the Law, one shall justify the need to make the territory a part of the nature reserve fund. The law does not specify whether any community needs or requirements are taken into account when making such a justification for the use of land for purposes that run counter to the protection requirements.
As to the lands that are privately owned or used, one should also go through the withdrawal procedure for the purpose of the project as described in the previous sections. Further, this is followed by changing the land designation and allocation of land.
5.5.5. Potential issues and risks in relation to acquisition of land and the rights for constructing roads
We assume that the CRR will pass through the land that is currently not physically allocated (in situ), but the owners of land shares have the right to physically allocate it (in situ) and acquire property rights for allocating the land in situ under the Law On the Procedure of Allocating Land (in situ) to the Owners of Land Shares. Currently, the owner’s certificates for such land plots (shares) are the only title documents used for exercising the right to claim land (share) to be allocated in situ.
To alienate such property, one must first physically allocate the land and receive a government statement confirming the right to own this property (title) followed by the registration of the title.
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Please note that the current legislation provides for the termination of rights (titles) to such land plots (shares) solely by voluntary will of the owners.
5.5.6. Methods of control in relation to the contractor (or concessionaire) in terms of use and exercising the owner’s rights for the Project faculties and assets, including the contractor’s obligations in terms of zoning and spatial planning. Oversight mechanisms and compliance with environmental standards by the contractor.
When deciding to implement a PPP Project, the Cabinet of Ministers of Ukraine analyzes effectiveness of its implementation, which includes a detailed study of socio-economic and environmental impacts of PPPs.
One of the responsibilities of the concessionaire under the concession agreement for building and operating a motor road is adherence to the legislation of Ukraine during design, construction, repair and maintenance of roads in terms of environmental safety, protection of historical and cultural monuments, minerals, forests and land that are assigned to accommodate a road.
During the process of architectural design, the customer or the design bureau receive urban planning information and restrictions that specify zoning-related requirements.
During construction on the allocated property, the construction shall be carried out in accordance with the design, which should also pass a mandatory evaluation. The evaluation procedure includes checking the design for compliance with the legal requirements for construction, including environmental requirements. The concessionaire as the customer in the construction project is free in determining the features of the design and the design requirements within the limits of the project implemented under a concession agreement and in compliance with such requirements. The construction design shall be approved by the customer and set all the parameters of the construction. The authorities of the National Environmental Inspection participate in supervision (control) in the field of environmental protection, rational use, restoration and protection of natural resources. The Inspection has the right to receive information and perform audit and following the results publish binding recommendations and orders in case of violations of the environment protection legislation.
5.5.7. Opportunities for the implementing organization to receive additional property rights (such as land-use rights) associated with the Project and required to fulfill their obligations, for example, for access or passage through a property owned by third parties
Land ownership rights for CRR construction purposes shall be provided solely for the purposes and to the extent necessary for such construction.
If necessary, the owner or tenant (concessionaire) can obtain a term easement - the right to limited paid or free use of someone else's property (land plots). This easement may be established by the contract or a court order. In particular, the easement may be granted for the purpose of passage, transit, laying utility lines, etc. for the period of occurrence of such necessity. The right of easement is subject to registration in the State Register of Material Rights to Immovable Property.
If the PPP agreement is expected to provide communication and power lines, pipelines and other utility lines for further use (operation) and/or management where easement has been already established for with this purpose, such easement may be exercised by the private partner on behalf of a public partner.
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The availability of such easements shall be specified in the competition requirements to select a private partner and in the contract concluded under the public-private partnership.
5.5.8. Legally established but unnecessary restrictions on changing land designation and compensation for deforestation. The party responsible for compliance with these procedures. Options for streamlining these procedures.
Compensation for losses in agriculture and forestry caused by removal of agricultural and forest land for CRR construction purposes will not be effected in accordance with Article 208 of the Land Code.
In case of withdrawal of agricultural land, forests and shrubs for purposes not related to agricultural and forestry production, as is the case when withdrawing land for construction of CRR, the current legislation provides for compensation to the land-users. The amount of such damages and reimbursement claims shall be determined separately in each case and established in the resolution to withdraw or allocate the appropriate land plot for use. In the case of voluntary rejection of the right to continuous use, such losses shall not be reimbursed. Land owners and land users shall be compensated losses incurred due to withdrawal (buy-out) and temporary occupation of property and imposed restrictions. The amount of such losses shall be determined in accordance with the decisions of the commissions organized by local state administrations.
5.5.9. Regulating tunnel construction effects: damage to the environment, damage to communication lines, dissatisfaction among the population, etc.
Tunnel construction is carried out in accordance with the approved building codes, regulations and national standards. In particular, the national standards of Ukraine DSTU BD.2.2-10:2009 "Resource, Element-based Construction Work Estimate Standards. Tunnels and Subways. Maintenance Processes" and DSTU BA.3.2-9:2009 "Occupational Safety Standards. Repair of Urban Bridges, Overpasses and Tunnels. Safety Requirements."
Land ownership right extends to the space located above and below the surface area to the height and the depth necessary for construction of buildings and structures.
In the process of architectural design, the customer or a design bureau shall receive urban planning data, information about restrictions and specifications that define the features of construction on the land including restrictions arising due to the environment protection requirements and availability of infrastructure (communication and utility lines). If the project involves any violations of the established restrictions, they should be removed by the competent authorities prior to the project evaluation.
Compensation for losses in agriculture and forestry caused by removal of agricultural and forest land for CRR construction purposes will not be effected in accordance with Article 208 of the Land Code.
Construction allows for temporary disturbance of landscaping, if required by the design. In practice, the implementation of such a disturbance shall be agreed with the relevant services responsible for this infrastructure. However, the legislation does not mandate the constriction customer or the developer to provide an alternative service delivery to the residents.
5.6. Permits and Licensing Procedures for Building a Motor road
Following the conclusion of the land lease contracts for the construction of the CRR and concurrent registration of the lease, the concessionaire receives the right to develop the land.
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To be eligible for commencing construction works, the concessionaire (as the customer) shall obtain a permit to commence CRR construction work for a facility of category 4 or 5. The assignment of a complexity category 4 or 5 to the facility shall be made according to the criteria set by the Cabinet of Ministers on April 27, 2011, Reg. No. 557. Evaluation of CAT4 and 5 construction projects financed from public funds, the funds of public and municipal enterprises, institutions and organizations, as well as loans issued under government guarantees shall be carried out by an expert state-owned organization. The evaluation shall involve (including on the basis of civil law contracts) the experts on sanitary and epidemiological safety, environment, occupational safety, energy conservation, fire, emergency, nuclear and radiation safety experts who passed professional certification.
The customer, general contractor or a contractor are not required (if construction work is carried out without the involvement of subcontractors) to obtain other permits for construction works and removal of vegetation within the construction site if a construction permit is available.
5.6.1. Requirements for receiving permits and licenses. The procedure and timing.
A construction permit is issued by the state architectural and construction oversight authorities free of charge within ten working days from the date of registration of the application.
A comprehensive list of documents required for receiving administrative services and requirements hereto have been approved by the Order of the State Architectural and Construction Inspection on March 1, 2013, Reg. No. 39:
1) Permit application following a prescribed format; 2) Copy of the document confirming land ownership or user right (i.e., a copy of the lease contract); 3) Construction design papers, developed and approved in accordance with the law; 4) Copy of the document confirming the ownership of the building or a structure, or a written consent of the owner for construction works in case of reconstruction, restoration or repair; 5) Copy of the license authorizing construction works, certified in the prescribed manner (submitted if necessary); 6) Copies of appointment papers for the persons responsible for construction works and the persons engaged in architectural and engineering supervision; 7) Copies of duly certified qualification papers.
Should the state architectural authority fail to grant permission for construction work or refuse to issue it within ten days, the customer shall apply to the Ministry of Regional Development, Construction and Housing and Utility Services requesting action within ten working days associated with the issuance of this permit or refusal to issue. If the construction work permit or official refusal is not issued during this period, the right to perform construction work shall be in effect on the tenth working day following the registration of the application in the Ministry, while the permit is considered issued. 5.6.2. The ratio between the Project contractor’s capacity to receive the construction permit and its land rights. (Unjustified) legal restrictions.
A concessionaire shall enter into a separate lease contract for obtaining the right to develop land.
Further, the concessionaire (as the construction customer) shall obtain a permit to begin construction works according to the procedure presented in the preceding paragraph. The procedure for obtaining the right to start construction has become much simpler with the entry into force of the Law No. 3039-VI of 17 February 2011, which eliminated unnecessary legal restrictions of the right to develop land. 39 / 81
5.7. Road construction in concession projects
5.7.1. Legal status of a motor road as a subject matter of civil law
The legislation defines motor road as a "linear system of engineering facilities designed for continuous, safe and convenient movement of vehicles" (Art. 1 of the Law On Public Roads). The Law identifies the following types of roads:
- Public roads; - Streets and municipal roads; - Corporate (service) roads; - Roads built on private land.
Public roads meet the needs of the society in road passenger and freight transport. Public roads are owned by the state and are not subject to privatization. Public roads, which due to the expansion of city limits became a part of the municipal street and road network can be transferred to municipal ownership free of charge by the resolution of the Cabinet of Ministers (Article 7 of the Law On Public Roads).
The State Road Service administrates public roads in Ukraine (article. 9 of the Law of Ukraine "On roads").
Public roads may be offered for concession. According to Article 2 of the Law On Concessions for Construction and Operation of Motor roads, property created pursuant to the terms of the concession agreement or received as concession and located within the road easement area is subject to the public property rights transferred to the concessionaire’s possession and use during the term of the concession agreement; the property located outside the road easement area acquired by the concessionaire is owned by the concessionaire.
Municipal streets and roads are municipally owned and run by local governments. Some portions of municipal streets and roads that overlap with the national motor roads shall not be subject to privatization. Road lanes, man-made structures (bridges and overpasses), technical means of traffic control and lighting in the streets and roads of municipalities can be transferred to public ownership and from public to municipal ownership free of charge by the resolution of the relevant local authorities and the Cabinet of Ministers (Article 16, the Law On Public Roads).
Corporate (service) roads – commercial service roads owned by corporations or individuals. Managing, operating and development of corporate (service) roads are carried out by corporations or individuals, which property accommodates them (Article 22 of the Law On Public Roads).
Roads built on private land – the roads located in the areas owned by corporate (no-government) organizations or individuals. Motor roads on private land can be transferred in public or municipal property by the owners based on the resolution of the Cabinet of Ministers or local governments (Article 25 of the Law On Public Roads).
CRR is a public motor road.
5.7.2. Does the law contain any unjustified restrictions in terms of the ability of the parties to agree on the relevant provisions for the design and construction of the project (including in relation to: (a) applicability of construction standards - national and international; (b) development, review and approval of building plans and specifications; (c) design
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development; (d) concessor’s right to oversee construction process; (e) concessor’s powers to amend the design, if necessary; (f) the procedure of testing, inspection, approval and acceptance of the facility; g) latent defects and responsibility)?
With respect to (a) the applicability of the national and international construction standards:
According to Article 11 of the Law On the Building Codes use of building codes or their individual provisions is mandatory for all entities regardless of the type of incorporation, which carry out construction, urban planning, architectural activities and manufacture products for construction purposes. International, regional and national (state) building codes, regulations, standards and other countries’ standards shall be used in Ukraine in accordance with the international treaties of Ukraine ratified by the Parliament. In this case, the specified article found that if the building codes feature a reference to standards, then these standards become mandatory.
Thus, the parties cannot derogate from the government approved building codes, regulations and standards that are binding in Ukraine. However, the parties may agree on the conditions for the use of other (additional) building codes, regulations and standards for construction and/or operation of motor roads, including international.
As to (c) the development of the design:
The legislation does not provide for the concessionaire to participate in the development of design papers. This gap is proposed to be solved by making the appropriate changes to the laws governing concessions, as defined in Section 6 of the Report.
As to (b) the development, review and approval of construction plans and specifications; (D) concessor’s rights to supervise construction; (E) concessor’s powers to amend the design, if necessary; (F) the procedure of testing, inspection, approval and acceptance of the facility; (G) latent defects and responsibilities:
The law does not contain any significant undue restrictions relating to the ability of the parties to negotiate and agree to relevant provisions of the concession agreement, without derogating from the binding procedures provided for by the law in the area of urban development (e.g. commissioning of a newly-built facility), and in compliance with mandatory Ukrainian building codes and standards.
5.8. The operation of the motor road concession projects 5.8.1. Does the law foresee any (unnecessary) restrictions in terms of operation of completed facilities or the parties’ rights to agree appropriate conditions hereto?
According to Art. 30 of the Law On Public Roads, the functioning of paid public roads shall be organized either by the enterprises reporting before a government authority responsible for public motor roads or concessionaires. This provision does not provide for the conditions for participation of private concessionaires in such activities, as well as possible participation of the contractors involved by the concessionaire. We recommend to initiate appropriate amendments to the law as stated in Section 6 of the Report.
5.8.2. What is the legal framework regarding maintenance of concession roads? Does the law say which party (public/private) shall assume the cost of maintaining concession roads? Does the law provide for a proper oversight mechanism by a government authority to maintain concession roads according to the safety standards?
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According to Article 1 of the Law On Concessions for Construction and Operation of Motor roads, in terms of motor road maintenance, the concessionaire’s actions shall aim to ensure continuous and safe operation of the motor road in accordance with the standards and norms of road maintenance and the concession agreement provisions. A typical concession agreement to build and operate a motor road also establishes a concessionaire’s duty to operate the motor road.
The Law On Concessions for Construction and Operation of Motor roads specifies that the concession provider can partly finance (co-finance) construction and/or operation of roads based on the concession conditions to the extent and in the manner specified by the concession agreement using the funds provided by the National Budget’s special fund for the development and maintenance of public roads. A typical concession agreement for the construction and maintenance of roads implies the need to determine the distribution of road construction and operational maintenance costs between the parties (the amount of financing from public funds and by the concessionaire, including the planned period).
According to Article 7 of the Law On Concession for Construction and Operation of Motor roads, concessionaire shall:
Maintain technical condition of the motor road in accordance with the standards and norms of public road maintenance; Hand over the road to the concessor after the expiry of the concession agreement in the condition that meets the standards and rules of construction, reconstruction, repair and maintenance of public roads, which apply at the time of transfer.
Supervision over the concessionaire’s compliance with the concession agreement shall be concessor’s responsibility by law.
According to Art. 30 of the Law On Public Roads, the state authority responsible for public motor roads (Ukravtodor) shall perform compliance checks in terms of the status and the use of toll roads in line with established requirements and make proposals for bringing those violating the road maintenance rules and regulations to justice.
Road safety control measures can also be carried out by law enforcement agencies and the agencies responsible for monitoring the use and protection of land, the authorities exercising supervision over civil defense, environmental authorities and other.
5.9. Concessionaire’s return of investment
5.9.1. ROI Methods
Under current law, the concessionaire receiving a motor road in concession shall at its own risk and financial responsibility undertake to carry out construction and/or operation of such road; instead, the concessionaire is entitled to receive revenue from the motor road operation.
According to Article 4 of the Law On Concession for Construction and Operation of Roads, the concessionaire’s revenue sources from the operation of the motor road include:
Fares for using the motor road; Charge for operational readiness of the road, paid by the concessor; Fees for using motor road service facilities, paid by the user; Grants and/or compensations provided by the concessor;
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Other revenue sources of the concessionaire shall be established by the concessor on the basis of a feasibility study and/or project estimates and specified in the bidding documents and the concession agreement."
A typical concession agreement for the construction and operation of road provides the following list of the sources of ROI:
Introduction of motor road user fees, and Receiving profit from the use of relevant structures of the concession road and roadside infrastructure.
5.9.2. Does the law allow/enable an organization (including the concessionaire) to charge money based on the tariffs or charge fees from the customers directly for the use of services when needed?
Article 4 of the Law On Concessions for Construction and Operation of Motor roads affirms the right of the concessionaire to charge fees from the users of the toll road and also the fees for using roadside infrastructure. Thus, according to the Law On Public Roads, public road can be classified as a toll road on the condition of significant improvements and availability of an alternative free passage and this road shall not be subject to privatization.
The above provisions suggesting that the fees charged for using the motor road belong to concessionaire’s revenue sources are not consistent with the provisions of Art. 29 of the Law On the Roads, according to which "the fare shall be paid to the State Budget of Ukraine, it shall be earmarked and used primarily to repay the loans and the costs associated with the repair and maintenance of toll roads, and also to finance construction, reconstruction, repair and maintenance of other public motor roads.'" To resolve this conflict it is recommended to initiate amendments to the legislation. Relevant suggestions are given in Section 6 of the Report.
5.9.3. Does the law allow the contracting authority (or any other government authority) to pay the organization for services when needed?
The Law On Concessions for Construction and Operation of Motor roads expressly provided that the concessionaire’s source of revenue may include the following payments by the concessor:
- Fees for the operational readiness of the motor road; - Grants and/or compensation.
In addition to the concessionaire’s sources of income from the operation of the road as indicated by the above law (see Par. 5.9.1 of the Report), the concessor can identify other sources of income of the concessionaire. These additional sources of income shall be determined by the concessor on the basis of a feasibility study and/or project estimates and specified in the bidding documents and the concession agreement.
Thus, the concessor, if necessary, may establish an additional source of concessionaire’s income in the form of payments made to the concessionaire by a contractor/public authority. Payments for services shall be appropriately earmarked in the appropriate budget.
5.9.4. When appropriate, does the law have relevant measures to regulate prices and tariffs established by the organization? At the same time, whether the law provides sufficient flexibility in terms of adjusting their prices based on the actual market demand (traffic flow)? 43 / 81
Art. 4 of the Law On Concessions for Construction and Operation of Motor roads, provides that the Cabinet of Ministers shall determine the maximum and minimum amount of fees for using the toll roads constructed under the terms of the concession.
The Cabinet of Ministers’ Decree No. 1299 of August 22, 2000 approved the procedure for setting maximum amount of fees for using the toll roads constructed under the terms of the concession. The procedure provides that the maximum amount of fees for using the toll roads constructed under the terms of the concession shall be determined by applying general pricing principles based on projected traffic volume and the type of vehicles using these roads. In accordance with the specified procedure, maximum fares established by the Cabinet of Ministers may be revised at the initiative of the concessionaire. In this case, before drafting of the state budget for the next fiscal year, the concessionaire shall submit the concessor with the papers specified in the concession agreement. The concessor shall consider the papers within one month and if the concessionaire’s offer of a new maximum fare is upheld, the concessor shall submit it for approval to the Cabinet of Ministers.
A typical concession agreement for the construction and maintenance of roads requires establishment of a fixed fare (in UAH) during the first year of the road operation.
The Law On Concessions for Construction and Operation of Motor roads implies that the Cabinet of Ministers shall determine the procedure of free passage by the roads constructed under the terms of the concession and its reimbursement. The procedure for redressing free passage by the roads constructed under the terms of the concession has been approved by the Cabinet of Ministers on July 6, 2000, Reg. No.1065. The above Procedure defines the list of vehicles that are eligible for free passage by the roads constructed under the terms of the concession and the procedure of receiving appropriate compensation. 5.9.5. Which measures have been prescribed by the law for prevention of non-payment and punishment of the offenders?
The law does not set any special conditions to prevent payment evasion in the concession activities and punish the offenders, such as imposing of fines for administrative violations.
The general provisions of the Civil Code of Ukraine provide that in case when the debtor breaches his commitments, he must pay the creditor money as forfeit (fine or penalty).
5.9.6. Does the law set any standards or requirements for services provided by the concession road operators?
Yes, the law established such standards and requirements.
The Law On Public Roads imposes the development of standards and regulations for the construction, reconstruction, repair and maintenance of roads on a public authority managing roads in consultation with the relevant government authorities responsible for road safety. Adoption of the national standards for the construction, reconstruction, repair and maintenance of roads shall be carried out by the central executive body responsible for the national policy in the sphere of technical regulation.
The Order No. 391 of the State Agency of Motor roads of Ukraine (Ukravtodor) issued on October 12, 2012 approved the TORs of the Industry Building Codes and the Regulations Fund, whereby the relevant Fund shall collect information on the current regulations in Ukraine in the field of public roads, organize, register, store, update it and create conditions for the use of these documents by enterprises, institutions, organizations and commercial companies which report to Ukravtodor.
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The list of technical standards in road construction and maintenance is available on the Ukravtodor website: http://www.ukravtodor.gov.ua/tekhnichne-regulyuvannya.
On March 30, 1994, the Cabinet of Ministers approved (Reg. No. 198) the Uniform Rules of repair and maintenance of roads, streets, railroad crossings and the terms of use and safeguarding them. They apply to automobile (country) roads, streets and public roads, railway crossings within the alienation zone and red lines and shall be mandatory for their owners or their authorized agencies, organizations engaged in repair and maintenance of road facilities and the users. According to this Regulation, the basic requirement for the transport and operating conditions of road facilities is the compliance of controlled parameters of their individual elements and facilities in general to DSTU 3587 "Traffic Safety". Roads, Streets and Railway Crossings. Operating Condition Requirements."
Motor roads and road maintenance requirements are also regulated in the national building codes, including DBN V.2.3-4: 2007 "Transport Facilities. Motor roads." 5.10. Early termination of the project (concession) contract 5.10.1. Does the law impose any (unjustified) restrictions on the parties’ ability to agree the rights and the procedure of contract termination best suited to the project?
Article 15 of the Law On Concessions provides the following grounds for the termination of a concession agreement:
Expiration of the concession agreement; Court liquidation of the concessionaire, including in connection with bankruptcy; Revocation of a business license issued to the concessionaire; Termination of the subject matter of the concession (destruction of road or damage which precludes its further use); Termination of the concession agreement by parties’ agreement; Termination of the concession agreement by the court at the request of either party in the event of default of the parties and for other reasons as prescribed by the laws of Ukraine.
The said law and the Standard Concession agreement to build and operate a motor road do not provide for any other grounds for termination of the concession agreement apart of the above. However, one should note that in accordance with the Commercial Code of Ukraine (Art. 179, Part 4), the parties are not allowed to derogate from the conditions of standard contracts approved by the Cabinet of Ministers, although it is allowed to specify their provisions.
We’re aware about some case law (see. Par. 5.4.1 of the Report) showing that after considering a dispute the Supreme Economic Court of Ukraine ruled that the parties could not envisage any additional grounds for unilateral termination of the agreement in the concession agreement, unless such grounds were prescribed by the law and by the relevant standard contract. With these in mind, there is a risk of court invalidating the provisions of the concession agreement involving other grounds for the termination of the contract rather than the ones established in the Law On Concessions and in the standard contracts.
However, one should note that the foregoing court policy is inconsistent with Art. 651 of the Civil Code, which stipulates for the right of the parties to the contract agree on the reasons for its termination and, in particular, the right to establish a possibility to unilaterally terminate the contract. To avoid ambiguous application of the law, it is recommended to initiate amendments to the legislation. Relevant suggestions are given in Section 6 of the Report.
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5.10.2. Does the law provide adequate conditions for the beneficiaries of compensation payments after its expiry (including, but not limited to time and the procedure of receiving such payments)? Should the concessor decide to offer benefits subsidies and compensation, the decision shall include the amount of benefits, subsidies and compensation and eligibility conditions and terms pursuant to the Procedure of selecting concession facilities where the concessioner may be eligible for benefits in terms of concession payments, subsidies, compensation and their provision conditions approved by the Cabinet of Ministers on July 13, 2000, Reg. No. 1114.
Contract termination shall not discontinue the liabilities to pay the compensation that arose before contract termination.
In case of breaching the deadlines or conditions by the concessor, it can be subject to penalties such as forfeit (fine, penalty) in the manner prescribed by the law and the terms of the contract.
5.10.3. Does the law provide for sufficient transparency in terms of transferring certain (public) assets to the government and keeping of other (private) assets by the concessionaire?
The law On Concessions determines that transfer of facilities into concession does not involve the transfer of ownership rights to the concessionaire and does not terminate the public or municipal ownership rights to these facilities. Property created pursuant to the concession agreement shall be the subject matter of public or municipal ownership rights. The property acquired by the concessionaire pursuant to the concession agreement shall belong to him by the right of ownership and can be transferred to the public or local community ownership after the expiry of the concession agreement in accordance with the conditions stipulated in this Law and the concession agreement.
According to the Law On Concessions for Construction and Operation of Motor roads, property created pursuant to the terms of the concession agreement or received as concession and located within the road easement boundaries shall be a subject matter of public property transferred into the concessionaire’s possession and use for the duration of the concession agreement. The property acquired by the concessionaire and located outside the road easement boundaries shall be the subject matter of concessionaire’s ownership. The Law On Public Roads defines easement as "land granted in the prescribed manner for building the road."
In the event of termination of the concession agreement, its expiry, liquidation of the concessionaire in connection with bankruptcy or revocation of the business license, the concessionaire is obliged to return the concession property to the concessor under the conditions specified in the concession agreement.
The procedure for transfer of assets, particularly in terms of documents and deadlines may be further regulated in the concession agreement.
In order to more clearly define the legal status of the assets acquired or constructed during the concession project, it is necessary to appropriately amend the legislation as described in Section 6 of this Report.
5 .11. Dispute Resolution
5.11.1. Does the legislation provide for the parties to the project agreement a sufficient scope of rights and flexibility so that they could agree on the dispute resolution mechanisms that best meet the needs of the project (including the choice of the law/international arbitration/mediation)? 46 / 81
According to Article 16 of the Law On Concessions, disputes arising from concession agreements shall be considered in court in accordance with the laws of Ukraine. Disputes arising from concession agreements between non-residents shall be settled in the manner prescribed by the law and may be considered by the international arbitration at the jurisdiction specified in the contract.
However, the Law On International Commercial Arbitration also includes litigation as the competence of international commercial arbitration for the companies with foreign investment established in Ukraine (disputes between themselves, their members, as well as other corporations in Ukraine), which under the law of Ukraine are considered residents. Hence, current law allows arbitration courts to also consider disputes involving the residents of Ukraine - companies with foreign investment if the dispute does not fall under the exclusive competence of the Ukrainian courts. According to Art. 77, Part 1 of the Law On International Private Law, Ukraine’s court jurisdiction is exclusive in cases with a international component, especially if the real estate being the subject matter of the dispute is located on the territory of Ukraine.
It is expedient to amend the legislation that directly provides for the possibility of resolving disputes arising from the concession agreements by the international arbitration tribunal in accordance with the procedure laid down in the legislation. The proposals for relevant changes are mentioned in Section 6 of the Report.
The possibility to resolve disputes through mediation is not available.
5.11.2. Are there any "gray areas" allowing to bypass dispute resolution mechanisms stipulated in the project agreement? What possible obstacles may arise during the enforcement of arbitral awards?
According to the Law of Ukraine On International Commercial Arbitration, arbitral award regardless of the jurisdiction where it was made shall be considered mandatory and enforced in Ukraine after submission of a written request to the competent court if the Ukrainian court has not refused to recognize or enforce such a decision.
The Law On International Commercial Arbitration provides an exhaustive list of grounds for refusal to recognize or enforce the award.
In general, there should not be any obstacles with the enforcement of the award if the award has been properly documented and the arbitration clause correctly drawn. However, we cannot exclude the other party delaying enforcement through procedural means. Also, we are aware of some cases of complications arising during enforcement of arbitration awards in connection with participation of the prosecutor as a defender of the interests of the state in parallel and related disputes in Ukraine.
5.12. Amending the Legislation. Miscellaneous 5.12.1. Does the law sufficiently protect the implementing organization from changes in the law?
The law provides for the concessionaire organization sufficient protection against changes in legislation.
The Law On Concessions expressly determines that the terms of the concession agreement are valid for the entire duration of the contract, including when after signing the contract, the laws establish the rules that deteriorate the concessionaire’s situation.
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According to the Law On Concessions, the government shall ensure compliance with the legally established conditions for performance of activities by the concessionaires related to the implementation of concession agreements, protection of their rights and legal interests. The changes to the law should not worsen the conditions of project implementation by the concessionaires under the terms of the concession.
5.12.2. Does the law contain any (unjustified) restrictions in terms of: transfer of technologies necessary for the facility’s operations? Training contractor’s personnel? "A share of local production" in the total volume of goods, services and personnel involved in the project implementation? Operation, maintenance and supply of spare parts (if necessary) by the concessionaire some time after the contract termination?
Regarding the transfer of technology needed for facility’s operation:
According to the Law On Concessions, the procedure of using facilities falling under the intellectual property rights is one of the essential conditions of the concession agreement. The obligation of the concessionaire and the conditions of technology transfer after the termination of the concession agreement can be specified in the concession agreement.
Regarding training of contractor’s personnel:
A concessionaire has the right to contract third parties to perform special assignments on the concession facility; however, the concessionaire is responsible for complies with the terms of the concession agreement by the third party and the laws of Ukraine. Thus, if the concessionaire involves contractors to perform some work, he shall arrange for appropriate training of such persons. The law does not set any undue restrictions on personnel training.
As for "the share of local production" in terms of goods, services and personnel involved in the project implementation:
The Law On Concessions established the following obligations of the concessionaire:
− Conclude labor contracts in compliance with the labor law, usually with the citizens of Ukraine; − Use technologies, materials and equipment of domestic production on the concession site, unless otherwise provided by the terms of the contract.
Among the essential conditions of the concession agreement, the Law On Concessions mentioned employment of the citizens of Ukraine and requirements to use domestic raw materials, which the parties must establish in the contract.
A standard concession agreement for construction and maintenance of roads has been approved by the Cabinet of Ministers on Oct 4, 2000, Reg. No. 1519. It provides, inter alia, for the requirement to attract at least 90% of workers - the citizens of Ukraine and use 70% of domestic materials. This limitation is considered unjustified. These provisions of the Standard Concession Agreement are based on the provisions of the previous version of the Law On Concessions for Construction and Operation of Motor roads that are not mentioned in the new version of the law. We recommend to initiate bringing the standard contract in compliance with the current version of the law, which does not impose such restrictions.
With respect to operations, maintenance and supply of spare parts (if necessary) by the concessionaire some time after contract termination: 48 / 81
The legislation does not contain any requirements for the concessionaire to operate or maintain and supply spare parts some time after the termination of the concession agreement. However, by parties’ agreement, such requirements may be stipulated in the relevant concession agreement.
6. LEGAL BARRIERS THAT REQUIRE CHANGES IN LEGISLATION
Regulation Issues Proposals Comments The Law On Public Roads No.2862, September 8, 2005 Art. 1 "Easement zone" is Narrow down the definition According to Art. 2, Part 5 defined as land provided of "easement zone" to of the Law On Concession to accommodate the road. "parts" of the land where for Construction and the road elements defined in Operation of Motor roads, Art. 9, Part 1 hereto, are the property acquired by actually located or specify a the concessionaire and different mechanism for located outside the determining the boundaries easement zone is a subject of the "easement zone" matter of concessionaire’s according to DBN V.2.3- ownership 16:2007. rights. With the purpose of separation from public property one should clearly define the concept of the "easement zone". Art. 9 There have been One should define integral As public roads can only identified facilities, parts of a motor road as be owned by the state, the structures and other motor facilities, structures, motor road components road components that can mechanisms and equipment should include only the be located both within and used solely for the purposes facilities that are directly outside the easement zone of operation and and technologically related to accommodate the road; maintenance of the motor to the road and ensure its however the legal basis road. Narrow down the list functioning. Road for building a motor road of motor road components components should not on the relevant property located outside the easement include facilities that may outside the easement zone zone as defined in Part 3 belong to private persons. has not been defined. and exclude "dual use" facilities such as service facilities, parking lots, etc., which may be privately owned and therefore should not be determined as components of a motor road. Art. 9 The motor road Supplement Art. 9 with a According to Art. 7, all components include separate part giving a public roads are publicly facilities and structures tentative list of road owned and are not subject that could theoretically infrastructure facilities to privatization. It is be privately owned, but located outside the easement necessary to separate the according to this Law if such facilities and zone which can be both components of the motor 49 / 81
buildings belong to the public and private, including road, one being its integral motor road components, gas stations, motels, parking part and serving directly they cannot be privatized lots, camper rest areas, and exclusively for the in view of the provisions service centers and more. operation of the motor of Art. 7 hereto. Also its important to define road. The other being the that the facilities, buildings facilities and components and equipment that can be that are used to meet the used to serve the needs of needs of motorists. the motorists can be built within the easement zone; however they are not an integral part of the motor road and may be privately owned.
Art. 27 It is not stated that the The conditions of referring The proposal is aimed at basis and a prerequisite the road to a toll road addressing the need for for assigning a road to the category should be clarification about the category of toll roads supplemented with a new future referral of roads could be construction of condition i.e. building of a built under the concession such a road. The Article motor road. Establish it as terms to the category of toll stipulates that a follows: "Referring the road roads. prerequisite for referring a to a toll road category only road to the category of toll upon the condition of roads can be a substantial construction or substantial improvement of this road improvement of this road, and provision of an on terms that are acceptable alternative for free under the applicable passage of vehicles. legislation and provision of an alternative for free passage of vehicles."
Art. 28 Charging fees for using Remove the phrase "and With the current version of toll roads has been charging toll for using the law, the toll road imperatively laid upon a them" from the standard. operator (concessionaire) state authority managing Alternatively, Art. 28 can be cannot administer fees for public motor roads thus supplemented by a separate using the toll road, which preventing introduction of part, which would allow increases the risks of the fees by the road operator government authority concessionaire and (concessionaire). responsible for public motor consequently affect the roads delegate its authority economic performance of for charging toll to the the project. operator of the 50 / 81
corresponding road.
Art. 29 It’s been determined that Supplement it with the It sets a distinction the payments go to the provision that the fare paid between directing the National Budget of for using toll public motor payments for using public Ukraine and are roads that were built from motor roads, built or exclusively earmarked and used primarily to the funds raised by the improved under conditions repay the loans and the concessionaire under the other than the concession costs associated with the concession and/or other agreement and fees for repair and maintenance of relevant agreement shall be using toll roads that were toll roads and to finance credited into the built by the concessionaire construction, concessionaire’s account under the concession reconstruction, repair and and shall be used both to and/or any other maintenance of other public roads, which is maintain proper road agreement. against the concession condition, meeting the
law. relevant concessionaire agreement requirements and for other purposes determined by the concessionaire under the concession agreement.
Art. 30 Operation of public toll Amend Art. 30 clarifying A concessionaire may use roads is provided by that the operations of the contractors to ensure the public road maintenance toll public roads constructed operation of public toll enterprises reporting under the terms of the roads built under before a government authority responsible for concession shall be concession terms. The public motor roads or by provided by the conditions and procedures the concessionaires. concessionaires and/or should be defined in the Participation of a private engaged persons on terms contract. The procedure for concessionaire in such and in the manner inspecting the road built as activities is not provided prescribed by the a concession should be for, neither participation concession agreement. Art. determined accordingly in of the contractors involved by the 30, Part 2 about the annual a concession agreement. concessionaire. public administration inspections of public motor roads should be removed or restricted in relation to the roads constructed under the terms of the concession
Art. 31 The Law established that Change the wording from Considering the proposal to the agencies securing the "Regulatory agency Art. 30 of the Law (see. operation of toll roads responsible for the above) the operation of toll bear the responsibility for operation of toll roads ..." to roads can be arranged not their technical condition, "persons securing the only by government 51 / 81
compliance with the operations of toll roads ..." agencies but also y private regulations and standards law entities, in particular of maintenance and repair the concessionaire and/or of roads and payments of involved individuals appropriate compensations. (contractors).
Art. 38 The law does not envisage Amend it with a separate The concessionaire shall be concessionaire’s ability to part, whereby posting of responsible for the road generate revenue from advertising along the motor condition, its operation and road advertising, which is roads transferred into the has a right to all revenue handed into concession concession, including received from the use of and operated and outside the road’s easement this road. maintained by the zone shall be agreed with concessionaire. the concessionaire. Concessionaire has the right to receive payments from the owners of concession road advertising.
The Law On Concessions No.997-XIV, July 16, 1999
Par. 6, Art. Concessions may be Supplement the concession The question whether a 3, Part 2 granted for construction concept as follows "design: concessionaire can make a (road construction works building (a system of road design independently is not associated with construction works clearly resolved by the law. construction, associated with the Given that the design reconstruction and major construction, reconstruction stages, in particular, repairs) and/or operation and major repairs) and/or include development of of motor roads, road operation of motor roads, working documents and a facilities and other road road facilities and other working draft performed structures. road structures. directly prior to construction and usually provided by construction companies, such an opportunity should be directly provided.
Art. 3, Part It specifies that the Provide the agency This will help avoid 6 ownership right to a exercising powers of the involvement of third relevant property shall be owner of land in relation to parties (public authorities exercised by the the land plots to be and local governments) concessor in accordance transferred into concession that are not parties to the with the law. However, with the duty to pass these concession and bear no the law does not specify plots on to the concessor. responsibilities within the
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the procedure of Provide for concessor’s duty project. mandatory transfer of land to demand such a transfer. to the concessor by the agency vested with the powers of the owner at the time of signing the concession agreement.
Par. 11, It specifies that the Enhance the powers and Changes are proposed in Art. 7, Part concessor acts as the duties: "... delegate certain view of the feasibility to 2 customer and carries out functions of the land-use expand opportunities for activities related to the project customer to the participation and control of approval and adoption of concessionaire in the cases the concessionaire to property management provided by the concession develop land use design projects in terms of agreement and agree the and making changes to it allocation of land, other land management project before its final approval. property management with the concessionaire." papers developed for the purpose of leasing land to the concessionaire for carrying out concession activities.
Art. 10 The term "conditions for Replace it with "conditions Will allow for the granting a land plot" has of land use." registration of rights to use quite a narrow meaning land by the concessor and for the purposes of the taking necessary actions by concession agreement. the concessor on behalf of the concessionaire as a developer without directly giving the rights to the concessionaire to use land.
Art. 18, The law provides that the Provide legal basis for land The land title may be Part 2, Art. land of public or use pursuing concession registered to a concessor or 3, Part 6, municipal property where activities, except for the third parties, but the Art. 10, a concession facility is land lease. The issue of land concessionaire should be Part 3 located is leased out to the use, if necessary, should be able to use them for the concessionaire and does decided before the purposes of the contract. not provide other legal enactment of concession. It The procedure, the terms basis for concessionaire’s is also important to exclude and responsibilities in land-use. In addition, Art. the concessionaire’s connection with the 18, Part 2 of the Law obligation to enter into land registration of land title require the concessionaire lease contracts within one should be defined in the to enter into land lease year from the effective date concession agreement 53 / 81
agreements no later than of the concession agreement considering the specifics of one year after the from Art. 18, Part 2. a particular project and the effective date of the current legal status of land. concession agreement.
Part. 1, The law does not provide Provide for the cases in the Should a concessionaire Art. 1, Art. private partners with law where the receive payment from the 10, Part 1, exemption from payment concessionaire may be concessor for the Art. 12, of the concession fees exempt from payment of operational readiness of Part 1, when granting a license to concession fees, particularly constructed road, create (build) a new in the case of a concession concession fees from the facility. for establishment concessionaire shall be (construction) of new deemed uneconomical. The facilities and in other cases draft Law On Amendments provided by the law. to Certain Legislative Acts of Ukraine (regarding the removal of regulatory barriers to the development of public private partnership in Ukraine and stimulate investment)" (hereinafter - the "Bill") provides appropriate proposals.
Art. 12, The Law provides for the To supplement the Law with This addition in the Law Part 4, possibility of giving the provision whereby the On Concessions for compensation only to the special laws in certain areas Construction and concessionaries of loss- of economic activity can Operation of Roads making and low-profit provide for benefits and associated will allow for concession facilities that compensation for the providing concessor are of great social concessionaries of other compensation to the importance. concession facilities in concessionaire to offset the certain cases. losses due to low traffic (below are the proposals to the relevant law).
Art. 16 The current wording of Provide that the disputes The Law of Ukraine On the law provides that arising from concession International Commercial disputes arising from agreements shall be settled Arbitration allows concession agreements in the manner prescribed by arbitration courts to also shall be reviewed by the the law and may be consider disputes involving court in accordance with reviewed by the the resident enterprises the laws of Ukraine; international arbitration at with foreign investments. disputes arising from the jurisdiction specified in The ability to resolve the 54 / 81
concession agreements the contract. dispute in arbitration is a with non-residents shall more attractive condition be settled in the manner for foreign investors. prescribed by the law and may be considered by the international arbitration at the jurisdiction specified in the contract.
Art. 15, The law does not contain It should be possible for the The grounds for Part 2, Art. instructions for the parties to the contract to termination of the 16, Part 3, parties’ right to agree on agree the grounds for its concession agreement the termination grounds in termination: the parties have should be agreed with the the concession agreement. the right to demand parties in a concession In case of breach of the termination of the agreement. concession agreement, the concession agreement on parties may request the grounds specified in the termination of the concession agreement and concession agreement in in accordance with the laws accordance with the laws of Ukraine. of Ukraine.
Art. 17 Concessionaire has no Allow the concessionaire to The right of the opportunities to participate in drafting of the concessionaire to participate in the design documents and give participate in drafting development of design him the right to participate design documents must be documents. and/or involve third parties explicitly stated in the based on the legislation. concessionaire’s initiative to develop design papers and
design solutions in connection with the construction of the concession facility.
The concessionaire has no Allow the concessionaire to Expand the rights of the right to participate in the participate in the concessionaire with the development and approval development of land use right to participate in the of the land use papers. papers and the right to development and approval participate and/or involve of land use. This right is third parties based on the relevant if the concessionaire’s initiative in concessionaire will acquire developing land use papers. land rights.
Par. 2, Art. The law does not provide Foresee the possibility of A part of the property,
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20, Part 1 an opportunity for the acquiring private property which the law does not concessionaire to acquire rights by the concessionaire imperatively define as the the title for the property for the property (a share) subject matter of law of established pursuant to the created pursuant to the public or municipal concession agreement in concession agreement and property, the the cases provided for in to acquire property in joint concessionaire may acquire such agreement. ownership of the it as private or common concessionaire and the property if this is done concessor in cases and in together with the the manner prescribed by concessor. the concession agreement and applicable law.
The Law On Concessions for Construction and Operation of Motor roads No.1286-XIV, December 14, 1999
Art. 1 Construction of roads Construction of road - a The question whether a only envisages system of design, research concessionaire can design implementation of a and road construction works independently is not clearly number of road associated with the defined. Given that the construction works construction design, design stages, in particular, associated with construction, reconstruction include development of construction, and repair of motor road. working documents and a reconstruction and repair working draft performed of the motor road, but it directly prior to does not include construction and usually concessionaire’s provided by construction participation in the design companies, such an and development of the opportunity should be construction project, i.e., directly provided. depriving the concessionaire of participation in the stages preceding road construction.
Art. 2, Part In selecting concession Exclude. The need for an alternative 1, facilities one shall provide passage occurs only after for a possible alternative assigning a motor road to passage pursuant to the the toll roads category. Law of Ukraine On Public Roads.
Art. 2, Part In terms of transfer of the The concession agreement The current wording can be 3, rights for road should establish grounds for interpreted as the need to
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construction to a the use of land. The provide the concessionaire concessionaire, the agreement can enter into with the right to lease land concession agreement force prior to providing the that is not always possible shall enter into force on concessionaire with a due to the fact that the road the date when the right to possibility of using the land. should be in public use land granted in the The contract may provide ownership; it’s not prescribed manner for for its early termination if advisable, since it road construction comes the concessionaire does not significantly increases the into effect. get that opportunity during cost of the concession the period specified in the project. contract.
Art. 2, Part It has not been determined It is necessary to limit the It is necessary to clearly 5, what kind of property concept of "property" as distinguish between those located in the easement used in Par. 1, Art. 2, Part 5 facilities that are built by zone and created pursuant of the Law with a concept of the concessionaire and to the terms of the "integral parts of the motor transferred to public concession agreement or road," as this term is ownership, and the received as concession defined by the Law "On facilities selected for shall be recognized as Public Roads." Road service construction with public property. facilities, structures, subsequent transfer to facilities located in the road private ownership for easement zone or outside it which the concessionaire and that are not an integral has the right to and where part of the motor road shall the concessionaire has the be the property of the ability to transfer such concessionaire or the person rights to third parties. having the right to build such road service facilities, buildings and other facilities provided by the concessionaire or with his consent in accordance with applicable law.
Art. 3 It has not been expressly Directly establish that in the provided for an exemption case of concession bidding, from having to comply competitive bidding with the public procedure stipulated by the procurement procedures current legislation of during concession Ukraine to regulate relations bidding. arising during procurement of goods, works and services for public funds is not applicable.
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Art. 3, Part The law lays the authority Amend Part 2, Art.3 of the According to the Decree of 2, for approval of concession Law and to provide that the the Cabinet of Ministers of bidding requirements terms of the concession July 17, 2013, No.640, the exclusively on bidding shall be approved power to conduct a Ukravtodor. However, by the "Concessionaire". concession competition for according to the law On building CRR was assigned Concessions, concession to the State Investment bidding requirements shall Agency, which is be approved by the inconsistent with the concessor. Ukravtodor is current version of the Law not the only executive (Art. 3, Part 2). authority which may act as concessor in granting road concessions, because according to the Law, a concessor here is the State represented by the Cabinet of Ministers or its authorized executive body.
Art. 4, Part It was determined that in Expand the list of A concessionaire shall be 1, addition to the concessionaire’s sources of entitled to receive all types concessionaire’s sources revenue contained in Art. 4 of income allowed by law of revenue from the by adding the following from using the road operation of the road sources: compensation of transferred into concession, explicitly mentioned in the costs of the provided that the this Article and other concessionaire for concessionaire and sources of revenue shall construction of roads, concessor agreed this in the be determined by the compensation associated contract. concessor on the basis of with low traffic and other a feasibility study and/or forms of public support. project estimates and shall Receiving payments for be specified in the bidding using the toll road, made by documents and the the user should allow for concession agreement. indirect receipt of such payments, when firstly such fee goes to the budget and then the concessionary shall fully or partially pay it to the concessor. To supplement the list as follows: "other sources not prohibited by law, as
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defined in the concession agreement." Instead, Par.6, Art. 4, Part 1 should be deleted.
Art. 4 The law provides that one To supplement the Potential concessionaires of the concessionaire’s provisions of the Law are often willing to sources of revenue shall whereby concessionaires participate in concession be concessor can be granted projects only if the risk of compensations. Thus, in accordance with the above compensation for losses insufficient traffic will be Article, the procedure for incurred due to low traffic, assume by the concessor calculating and providing in the cases and manner and, depending on the compensation is prescribed by the relevant financial model, the determined by the Cabinet concession agreement. concessor will compensate of Ministers. Current the loss of low traffic. legislation does not provide direct indication of the possibility of compensation to the concessionaire for losses due to insufficient traffic. Art. 6 The law requires the Supplement the provisions Simplify the system of concessionaire to make that concession payments payments. Depending on concession payments in may not be made if the the funding model, a all cases. concession road is not concessionaire may receive defined as a toll road, or payment from the otherwise as determined in concessor, a part of which consultation with the he must return as concessor in the concession concession fees. Due to agreement. these cash flow the amount of budget financing only increases (cash flow) without changing the economic nature.
Art. 7 There has not been Provide that if the Attracting investors can envisaged any legal status concessionaire or of the reduce the required funding of newly created facilities entity authorized by the for the project at the cost of concessionaire exercises the the right to build which their implementation right to build road service belongs to the facilities on the property of (funding) of some concessionaire, neither the road management construction of road opportunities and the authority as a part of the service facilities. concessionaire’s rights to road transferred into attract investors and give concession, the right to own them the right to build such facilities arises with the concessionaire or the road service facilities on 59 / 81
road managing authority’s person receiving the right property transferred into from the concessionaire, concession. except for facilities that are part of motor road. The Law On International Private Law No. 2709-IV, June 23, 2005
Art. 77, The Law refers disputes Lack of coverage of The Bill proposes to Part 1, with a foreign component Ukrainian courts’ exclusive supplement Art. 77, Part 1 to the exclusive jurisdiction in the disputes of the Law about the exclusive jurisdiction of jurisdiction of Ukrainian arising from PPP contracts Ukrainian courts with the courts if the property in respect of immovable following exception: "apart being the subject matter of property situated in the from the cases concerning the dispute is located on territory of Ukraine is the conclusion, the territory of Ukraine. favorable to foreign modification, termination This situation prevents the investors. and performance of consideration of disputes contracts concluded in the framework of public- by foreign courts private partnership where (including arbitration) the immovable property is with foreign components a subject matter of such about the property partnership, and the situated in the territory of dispute does not concern Ukraine. the origin, suspension and registration of material rights to such subject matter ". The Law On the Sources of Financing Roads in Ukraine No.1562-XII, September 18, 1991.
It is not expressly To provide the possibility of provided for the building roads on the terms possibility of building of concession. roads under the terms of the concession agreement.
Art. 5 It’s been determined that Provide that the fare for the fare for using the using the toll road roads shall be paid to the transferred to concession or built under concession road fund which requirements may be contradicts the Law On forwarded to the Concessions, whereby the concessionaire or concessor above-mentioned fees are under the terms of the a source of concession agreement. concessionaire’s revenue from the operation of the road.
The Law On Alienation of Land Plots and Other Real Property Located Thereon for Social
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Needs or on the Grounds of Social Necessity, November 17, 2009, No. 1559
Art. 4, Part The alienation principles Replace or at least Unclear wording needs to 4, determine that buy-out supplement the specified be clarified. The proposed and expropriation shall be standard with a reference documents should remove carried out as an that buy-out and alienation otherwise possible risk of exception and in are subject to prior approval challenging the decisions compliance with of the construction concerning the purchase environmental safety feasibility study developed and expropriation on the requirements, ensuring in the established manner as basis of their invalidity. future sustainable use of defined in Art. 8 and 9 of Approved feasibility study land should the facilities the Law and the report on and the report on the be built only on the the environmental effects of environmental impacts alienated land or if such construction. should be considered construction on the other sufficient justification for land plots will directly such decisions. cause considerable material damage or adverse environmental effects to a relevant territorial community, society or the state as a whole.
Art. 5 There have been Develop and adopt a method The Regulations on the established general of determining the buy-out procedure of determining principles for determining price of the land, for the buy-out price of land, the buy-out price and example at the level of the in particular the procedure provided that its amount shall be approved by the Cabinet of Ministers of for determining the value executive authority or Ukraine. of land and real estate local government buying located thereon, and the land, or by the court, damage caused to the however there is no owner of land due to buy- mechanism (formula) of out need further detail at calculating it and there is the level of a subordinate no procedure of taking into account the amount legal act. of loss (including lost
profits) incurred by the owner as a result of such buy-out. Par. 2, Art. It specifies that the Supplement it, providing Art. 151 determined that 7, Part 2 location is agreed in that the actions required for the agreement is carried accordance with Article approval are made by the out on the initiative of 151 of the Land Code of executive authorities and corporations interested in Ukraine. local governments eligible buying out land. The for buy-out or corporations proposed changes will 61 / 81
interested in buying out land allow providing the on the basis of agreements possibility of approval of with the above authorities land allocation in the concluded in accordance concession agreement by with the current legislation the concessionaire. of Ukraine.
Art. 12, No deadline has been It is important to clearly Art. 16 established from which establish the deadline after the relevant executive the expiry of which the authority or local body issuing the decision government acquires the concerning the purchase of right to appeal to court for land and other immovable compulsory alienation of property located thereon land and other immovable may apply to the property located thereon Administrative Court for the for public use based on compulsory alimentation of the grounds which allow the property. This period expropriation of this could be, for example 2 property for social needs. months from the date of notification about the buy- out for public needs, if the owner has not agreed to negotiate the price, or 6 months after obtaining consent of the owner to negotiate, provided that the parties failed to reach an agreement with the owner on the terms of purchase.
Lack of regulated Develop the necessary procedures for subordinate legislation, such determining "equivalent" as at the level of the Cabinet land plots that may be of Ministers aimed at offered from public and detailing the Law on the municipal property in procedure of defining exchange for private land. "equivalent" land that may be granted in exchange for the property that is redeemable or subject to forced removal.
There has not been Amend the Law with a The law does not permit provided opportunities to separate Article whereby: buy-out, forced removal or purchase land shares that expropriation of land 62 / 81
have not yet been - Stipulate shares. First, it is necessary physically allocated and compulsory to allocate the relevant land there is no procedure of allotment of land in situ and give the title their expropriation. The shares (in situ), documents to the owners. status of former collective followed by its Then buy-out, forced farm land using which removal under the removal or expropriation land shares are allocated conditions can be performed under the has not been separately prescribed for buy- standard conditions. regulated. out and However, the current expropriation of legislation does not allow land. forced issuance of deeds for the distributed land. We It also requires amendments consider it appropriate to to the Law of Ukraine On address this issue by the Procedure for (in situ) amending the relevant Land Allocation to the laws. owners of land shares."
The Law On the Procedure for (in situ) land allocation to the owners of land shares, No.997- XIV, July 16, 1999
The Law does not provide Implement comprehensive Also require amendments for such grounds for in amendments to the Law to the Procedure of state situ land share allocation providing for the possibility registration of rights to as buy-out (removal) for of compulsory allotment of immovable property and public purposes and does land (shares) (in situ), restrictions approved by not involve the state as an followed by its removal the Cabinet of Ministers. entity with the right to under the conditions allocate land in situ. prescribed for buy-out and expropriation of land and its registration as public property.
The Law On the Nature Reserve Fund, No. 2456-XII, 16.06.1992
Art. 54, It specifies that the change Supplement it by In the law this will allow Part 1 of borders and the additionally providing for balancing the interests for abolition of the status of the opportunity (besides the the conservation of the the nature reserve fund are expert opinion) to justify nature reserves and made similarly to their changes in the boundaries implementation of socially creation, in coordination (cancel the status) of the important projects by with the Ministry of natural reserve fund based opening legal ways to Environment and Natural on appropriate justification address the issue. Resources on the basis of of the availability of public appropriate expert or social need. Thus, the opinion. presence of national interest
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may be the reason for changing the boundaries of the nature reserve of national significance and the presence of local community interests - local significance.
The Law On Public-Private Partnership, No.2404, July 1, 2010
Art. 1, Part The current wording of This provision of the Law A contractual procedure for 1 the Law provides that: should be deleted; instead, regulating relations "the features of we should complement Art. between private partners is participation of several 1 with a position provided in the bill. persons on the side of the determining the procedure private partner in the for regulating relations bidding to select a private between private partners on partner for PPP a contractual basis. implementation shall be established by the Cabinet of Ministers of Ukraine."
Art. 1, Part The law does not provide Since the private partner Provisions allowing the 1 for establishment of a selection competitions can competition winner to corporation dedicated to involve foreign corporations create a corporation for the implementation of and/or individuals, it is concluding a contract PPP by a winner of the advisable to let the winner under a public-private competition which could (s) of such competitions to partnership are provided in facilitate participation of create a separate entity for the bill. foreign business in PPP. the purpose of concluding the contract under PPP.
Art. 1, Part The law does not provide Allow for the involvement Corresponding changes are 1 for participation of a third of public and municipal envisaged in the bill. party - the company, enterprises to participate in the contract under the PPP which is owned by the on the public partner’s side, public partner in the due to the fact that the contract under PPP. implementation by a public authority or local government of all partner functions under the PPP agreement can be ineffective. Art. 6, Part The law provides that It is not feasible to apply the The bill contains a 1 public procurement in Law On Public provision according to PPP shall be made Procurement and On which the laws on public pursuant to the legislation Special Aspects of procurement do not apply 64 / 81
on procurement of goods, Procurement in certain to PPP projects. works and services for areas of economic activity public funds. for procurement of goods, works and services carried out under the PPP with a special selection procedure of the private partner supplying goods and services.
Art. 7 The possibility of private It should be possible for a partner acquiring the private partner to acquire property created or ownership of the facilities purchased by him in the created or acquired by him PPP is not envisaged. in the PPP, in cases which do not conflict with existing legislation and provided in the relevant PPP contract.
Art. 17 The law provides for an To make it possible for the opportunity to amend or contracting parties to terminate the contract in identify in such a contract case of a significant the basis for amendments change in circumstances which the parties were and termination of the guided by in the contract. contract and include The parties cannot appropriate procedures. provide for additional grounds in the contract for amending or terminating the contract. Art. 19 The law does not provide To provide for the The ability to resolve a for the procedure of settlement of disputes dispute by arbitration is a settlement of disputes arising from agreements more attractive condition concluded in the PPP arising from agreements for foreign investors. framework in particular, it concluded in the should be possible to review framework of PPP. such disputes in arbitration at the jurisdiction chosen by the parties. The Civil Code of Ukraine No.2768-III, January 16, 2001
Chapter 70 The issues of property Supplement it with a The operation of the management have been separate Article 1045-1 concession facility by its regulated without "Features of managing legal nature is similar to considering the facilities transferred into civil and legal institution of peculiarities of concession concession" where one property management. relations. should clearly define that However, the Civil Code of
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these features were Ukraine stipulates a determined by law and the number of conditions - provisions of Chapter 70 of non-specific to the the Civil Code of Ukraine concessions, in particular, shall apply, unless otherwise the need for notarization of provided by concession. the property management contract, the status of property acquired in the management process, ability to unilaterally refuse management, regime of trusts and more.
The Law On Public Procurement, No. 1197-VII, April 10, 2014
Art. 2, Part It is not expressly Foresee that in case of the The bill provides for the 3 provided that in the case use of public funds for appropriate amendments. of using public funds for construction of roads under construction of roads the terms of concession, the under concession Law On Public agreement, the procedure Procurement and the of procurement of goods, procedures provided for in works and services for the said Law do not apply. public funds provided for in the law does not apply.
The Law On Special Aspects of Procurement in Certain Areas of Economic Activity, No. 4851-VI, May 24, 2012
Art. 4, Part The Law does not ensure Foresee that in case of the The bill provides for 1 that its scope is not use of public funds for amendments to Art. 4, Part covering procurement of construction of roads under 1 of the Law, which goods, works and services PPP, including concessions, introduced additional for public funds that are the provisions of the Law exceptions to the carried out in the will not apply. application of the framework of PPP, provisions of the Law. particularly in procurement carried out pursuant to concession agreements.
The Law On Lease of Public and Municipal Property, No.2269-XII, April 10, 1992
Art. 1 The Law does not provide Foresee that the private Relevant offers foreseen in for the legal regulation partner’s use of the property the bill. features of usage of public created or acquired by him or municipal property pursuant to the contract 66 / 81
created or acquired entered into under the PPP pursuant to a private shall be regulated by the partner’s agreement Law On Public-Private concluded under the PPP Partnership upon the after the transfer of title transfer of the title for such for such property to the property to the state, government or local territorial communities or community. the ARC.
The Procedure of Concession Bidding for Construction and Operation of Motor Roads approved by the Cabinet of Ministers of Ukraine on October 4, 2000, No.1521.
New version developed Make the Procedure for according to the ‘99 organizing concession edition of the Law On bidding for construction and operation of motor roads Concessions to Build and comply with the Law On Operate Roads. Concession to Build and Operate Roads and the world practice of concession bidding, subject to consideration of the following most common remarks. The phases, their Clearly define the stages, deadlines, the legal status deadlines and those of the concessionaire in responsible for conducting each phase of the certain stages of the concession bidding and concession bidding. the liability of persons organizing concession bidding are not clearly defined.
It does not allow Provide an opportunity to negotiating the terms of discuss the construction the concession agreement design and draft concession and construction design agreement before future prior to submitting the concessionaires send their final proposal to the future bids and the terms of such a concessionaries. stage.
It was established that the Review the bids of the It will enable to hold an decision about the concession bidding objective meeting to select winning concessionaire participants at open the winner of the shall be taken during meetings; however, the concession bidding and the closed session. bidders should remain reasons for the future concessionaires providing 67 / 81
anonymous. competitive conditions to raise funds for construction and maintenance of roads while the future concessionaires can to track and learn about the objective data, which is the basis for selecting the winner.
A Standard Concession agreement for Construction and Operation of Motor Roads approved by the Cabinet of Ministers on October 4, 2000, No.1519.
The approved standard Cancel or at least change the The agreement provides for concession agreement wording to comply with the conditions that do not does not meet the Law of Ukraine On comply with the requirements of today and Concessions for legislation. Under Art. 179, the international Construction and Operation Part 4 of the Commercial standards. of Motor Roads. Use the Code of Ukraine, the phrase "model contract" parties may not derogate instead of the "standard from the content of the contract". model contract, but shall have the right to specify its conditions. Instead, the model contract is only recommended for application as the parties may alter some of its terms or amend its contents.
Concession Insurance Procedures
There is no defined Develop and adopt a procedure for insuring Resolution of the Cabinet of concession facilities. Ministers on the procedures and rules for introducing compulsory insurance of property transferred into concession and a method of calculating insurance rates. Develop and adopt a model insurance contract.
The Decree of the President of Ukraine On Concessions for Construction and Reconstruction of Roads, No.735/98, 07.04.1998.
The Decree does not Amend the Law On The Decree was adopted in 68 / 81
comply with current laws. Concessions to Build and accordance with Par. 4 of According to the Operate Roads with a the Transitional Provisions Constitution, the Decree provision noting that "In of the Constitution of was in effect until the connection with the entry Ukraine, which authorized entry into force of the into force of this Law, the the President issue decrees relevant laws passed by Decree of the President of on economic issues the Parliament in 1999. Ukraine No. 735/98 of unregulated by the laws for However, the suspension 04.07.1998 On Concessions three years after the entry of the Decree in for Construction and into force of the connection with the Reconstruction of Motor Constitution of Ukraine. adoption of special laws is roads shall be terminated in not formalized as an act of accordance with paragraph law. 4, Chapter XV of the Transitional Provisions of the Constitution of Ukraine.
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7. RECOMMENDATIONS ON THE MOST RATIONAL WAYS TO REDUCE THE POSSIBLE LEGAL RISKS
This section reviews the legal risks of the Project for Construction and Operation of Kyiv City Ring Road (the “CRR”) analyzed in the course of preparation of this Report. These risks require special attention due to their importance for the Project and capability of being reduced by legal means. The risks listed in this section do not represent an exhaustive list of all risks pertaining to the Project. In this section of the Report, we review the possible ways to manage the identified risks which may be applied, in particular, if the proposals for legislative amendments presented in Section 6 of the Report are not taken into account. The risks are distributed by Project development stages. The distribution is rather arbitrary, and a certain risk may manifest itself at other stages of the project than formally indicated below.
STAGE I Cabinet of Ministers of Ukraine, or an agency authorized by it, making the decision to construct the road on the terms of concession
The decision to develop the Project on the terms of concession has already been made and stipulated in the Resolution of the Cabinet of Ministers of Ukraine of July 17, 2013, No. 640. 7.1. Application of the Law “On Public-Private Partnership” to the Project General Description of the Risk Situation According to article 5, part 1, of the Law “On Public-Private Partnership”, concessions are one of the forms of public-private partnership. This generally corresponds to the global practice, which shows that concessions, in particular for construction of motor roads, are one of the most popular forms of public-private partnership. The Law “On Public-Private Partnership” establishes several procedures fully or mostly serving the same purposes as the similar procedures provided for the specialized concession laws, in particular the Laws “On Concessions”, “On Concessions for Construction and Operation of Motor Roads”, and other laws and subordinate legislation (for more details, see section 2.1 of the Report). Such “competing” procedures, in particular, are the following: - proposals for performance of public-private partnership (article 10); - public-private partnership performance analysis (article 11); - assessment of the socioeconomic and environmental impact of the public-private partnership (article 12); - making the decision for performance of public-private partnership (article 13); and - supervision of performance of agreements executed within the public-private partnership (article 21).
Potential Consequences of the Risk Situation Application of the procedures provided for in the Law “On Public-Private Partnership” to the Project will make it unreasonably complicated, as it would require compliance with additional (as compared to the special concession laws) requirements.
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Risk Management Mechanisms Article 5, part 3, of the Law “On Public-Private Partnership” specifies that “the agreements made according to part one of the same article are regulated by the law taking into account the specific aspects provided for in this Law in case a decision for public-private partnership in relation to them is made according to the procedure prescribed by this Law”. This provision allows interpreting it in such way that if a decision to perform the concession project in the framework of public-private partnership is not made, the provisions of the Law “On Public-Private Partnership” shall not be applied to such project. The Resolution of the Cabinet of Ministers of Ukraine No. 640 of July 17, 2013 stipulates that the Project shall be performed on the terms of concession for construction and operation of motor roads; the decision to implement the Project in the framework of a public-private partnership was not made. Therefore, considering the provisions of part 5, article 3, of the Law “On Public-Private Partnership”, the special aspects provided for in this law shall be applied to the Project only if an additional decision to perform it on the terms of public-private partnership is made.
STAGE II. Development of Bidding Documents. Holding the Concession Bidding. Announcement of the Winning Bidder
7.2. Declaring a concession bidding procedure void General Description of the Risk Situation According to section 25 of the Procedure of Concession Bidding, the bidding procedure may be declared void in the following cases: - no bids were received during the bid submission period; - none of the submitted bids meets the bidding criteria; - all bids submitted are prepared with violation of the conditions specified in the bidding documents, and improvements may alter the position of the applicant; or - the requirements of the bidding committee to bring the bids in conformity with the conditions contained in the bidding documents are not complied with by any applicants within the specified time.
Potential Consequences of the Risk Situation Inability to hold the bidding procedure to award the concession, in particular due to low interest in the Project, clearly prevents its development. Risk Management Mechanisms Considering the most critical Project risks before the bidding documents are prepared and the bidding procedure is announced. Discussion of the draft concession agreement with the applicants, which would allow regulating the ways to reduce (some of) the Project concessionaire’s risks in the agreement before the bids are submitted by the potential concessionaires. Recommendations The Project should be presented in advance to the potential bidders, for example, in the form of a so- called “road show”, and consider the critical objections regarding the Project in the course of development of bidding documents. Such documents, to the extent possible, should provide for
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reduction of the Project risks for the concessionaire and/or ways to compensate them, which would make the Project more attractive for the potential concessionaires. It is desirable to include the draft concession agreement offered for review by the potential concessionaires to the concession documents, whereas the Concession Bidding Procedure should provide for a discussion of the draft concession agreement with the qualified bidders (see also section 7.3 of the Report).
STAGE III. Award of the Concession Agreement for the Construction of the CRR to the Winning Bidder
7.3. Failure to reach an agreement with the concessor regarding the terms of the concession agreement General Description of the Risk Situation According to article 8 of the Law of Ukraine “On Concessions”, the concession agreement shall be signed with the winning bidder not later than three months after the bidding results are published according to the procedure and conditions specified in this Law. Besides, according to the Concession Bidding Procedure, the concession agreement shall be signed by the concessor and the winning bidder within one week after the approval of the draft concession agreement. The concession agreement is deemed entered into starting from the day an agreement on all material terms has been reached and the text of the agreement is signed by the parties. The provisions of section 38 of the Concession Bidding Procedure specify that the concessor has the right to annul the results of the bidding and commence negotiations with other applicants in case an agreement regarding the terms of the concession agreement is not reached with the winning bidder due to the latter setting unacceptable conditions for the execution of the agreement. The procedure does not specify the consequences of such negotiations with another bidder, specifically whether the concessor may enter into an agreement with another bidder without holding a new bidding procedure. Is should be mentioned that the model concession agreement for construction and operation of a motor road approved by the Resolution of the Cabinet of Ministers of Ukraine of October 04, 2000 No. 1519 does not meet the current needs of concession relations and is unable to regulate the parties’ relations regarding the Project development effectively. Nevertheless, according to article 179, section 4 of the Economic Code of Ukraine, the parties only may make the provisions of the model agreement more specific, but are not allowed to deviate from its content. The Law does not provide for a mechanism to force the concessor to negotiate the terms of the concession agreement if they are not specified in the bidding documents and in the winning bidder’s bid. Potential Consequences of the Risk Situation The long procedure of negotiation of the terms of the concession agreement may delay the commencement of the Project, or, in the worst case, make Project development impossible if the concessor and the winning bidder fail to agree upon the terms of the concession agreement. In such case, the concessor may cancel the decision about the winning bidder. Assessment of Risks from the Standpoint of the Public and Private Partners The provisions of section 38 of the Concession Bidding Procedure provide a wide range of opportunities for the concessor to cancel the bidding procedure results as early as at the stage of preparation for signature of the concession agreement, considering the fact that the said Procedure
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does not specify the procedure of cancellation of the bidding results and does not specify the criteria by which the conditions required by the winning bidder are deemed inacceptable. Risk Management Mechanisms The key provisions of the concession agreement in the bidding documents (concessor’s responsibility), as well the provisions of the winning bidder’s bid (concessionaire’s responsibility) should be made more detailed. Inclusion of the draft concession agreement to the bidding documents. Negotiation of the draft concession agreement with the qualified applicants before they submit their bids. Recommendation There should be an opportunity to discuss the draft agreement with the applicants who pass the qualification before they submit the final bids. This would allow to have a project agreement agreed upon both by the concessor and the bidders by the time of the concessor’s evaluation of the bids. The current revision of the Procedure of Concession Bidding for Construction and Operation of Motor Roads requires the protocol on the bidding result to include, in particular, the justification for the selection of the winning bidder and the bidders ranking second and third. Should it for some reason be impossible to enter into the agreement with the winning bidder, the concessor must have the right to enter into the agreement with the bidder ranking second, or, if such bidder refused, with the bidder ranking third. It is desirable to specify such possibility in law by amending the Concession Bidding Procedure for Construction and Operation of Motor Roads.
STAGE IV. Acquiring Funding for the Project (Financial Closure)
7.4. Inability to acquire sufficient funding for the Project General Description of the Risk Situation Due to various circumstances, the concessionaire may fail to acquire the funding required for proper implementation of the Project and specified in the concession agreement. In the global practice, as a rule, acquisition of funding is a condition precedent to the concession agreement, the so-called "financial closure". If this condition is not met, i. e. the concessionaire fails to acquire the required funding within the time specified in the agreement, the agreement is terminated. The failure to acquire funding may be caused by a refusal of the financial institutions engaged by the concessionaire (the “sponsors”) to fund the Project. Given the relatively high risks of the Project, the financial institutions may desire state guarantees for the Project goals. The Budget Code of Ukraine specifies the procedure of giving state guarantees. The respective guarantees have to be provided for in the state budget. The decision to provide state guarantees for the Project has to be made by the Cabinet of Ministers of Ukraine. The inability to give state guarantees for the Project goals, in turn, may cause the financial institutions on the side of the concessionaire to refuse from funding the Project. The Concession Bidding Procedure for Construction and Operation of Motor Roads allows the concessor to cancel the decision on the winning bidder if the winning bidder fails to provide the guarantees specified in the bidding documents which confirm the winning bidder’s capability to provide proper funding of its concession activity. Potential Consequences of the Risk Situation Inability to acquire sufficient funding makes the implementation of the Project impossible. At the same time, the agreement with another concessionaire may be executed after a new concession bidding is held.
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Assessment of Risks from the Standpoint of the Public and Private Partners The refusal of financial institutions engaged by the concessionaire to fund the project for the reasons beyond the concessor’s control are the responsibility, and thus the risk, of the concessionaire. If the concessor fails to ensure the compliance of obligations assumed by it under the agreement, in particular as related to ensuring the provision of state guarantees and/or other participation in the funding of the Project, the risk and the obligation to reimburse the losses incurred by the concessionaire are borne by the concessor. Risk Management Mechanisms Negotiating the terms and procedure of (co-)funding of the Project by all of its participants in advance, including the financial institutions and the insurer, as well as signature of the required agreements and preparation of other documents. Recommendations By the time of participation in the concession bidding, the concessionaires must negotiate with the financial institutions the terms and procedure of their participation in the Project. The bidding documents must require the bidders to provide a written confirmation from the financial organizations about their readiness to fund the project (letters of intent, guarantee letters). Simultaneously with the execution of the concession agreement with the winning bidder, agreements must be made with other participants involved in the Project, including the financial institutions and the insurer. It would be reasonable to make amendments to the legislation in order to allow the concessor to enter into the agreement with the bidder that ranked second, and, if the latter refuses, with the one that ranked third, without holding a new bidding procedure, if the main concessionaire who won the bidding fails to ensure the required funding of the Project within the time specified in the concession agreement.
STAGE V. Seizure of Land Plots for the Project
7.5. Dispute on Justification of Selection of Land Plots and Grounds for Forced Seizure General Description of the Risk Situation The resolution on forced seizure of a land plot on the grounds of social necessity is made by the court. However, this procedure is not automatic. The court reviews the case materials and establishes whether there are grounds for buy-out (seizure) of the land plot. According to article 4, part 4, of the Law of Ukraine “On Alienation of Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Necessity” of November 17, 2009, No. 1559, the buy-out of land plots for social needs or forced seizure of land plots on the grounds of social necessity shall be performed as an exception while complying with the environmental safety requirements and ensuring further rational use of the land plots in case the facilities may only be placed on the land plots being alienated, or if the placement of such facilities on other land plots will directly result in significant material losses or negative environmental impact for the respective local community, society, or the state as a whole. The court has to establish whether there are grounds and to assess them for conformity with the specified criteria. Potential Consequences of the Risk Situation Different assessment of the specified seizure criteria may result in delays in the review of certain cases. It may become necessary to review cases for a second time in case of improper review and assessment of the case materials by the court of initial jurisdiction.
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Assessment of Risks from the Standpoint of the Public and Private Partners Seizure of land plots for the Project must be performed comprehensively for the purposes of implementation of the Project. Therefore, the identification of all circumstances and assessment thereof in separate court sessions is inefficient. A possible side effect of this inefficiency is the delay of certain judgments or even refusal due to improper review of the case. Risk Management Mechanisms Effective resolution of disputes may be ensured if a methodology is developed to be followed by the plaintiff in order to provide the court with all necessary evidence at the first stages of review of the case. However, this does not eliminate the need for comprehensive assessment of evidence by the court, which may result in delays in certain cases causing a general delay in the project. Recommendation We recommend to make the provisions of the Law of Ukraine “On Alienation of Privately Owned Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Necessity” more specific. For specific cases, such as implementation of a construction project, the Law should contain specific criteria for assessment of justification of buy-out (seizure) on the grounds of social necessity. In particular, it would be reasonable to supplement the law with a reference to establishment of such circumstances in the feasibility study for the construction of facilities specified in section 8 and 9 of the Law, as well as in the environmental impact assessment for such construction. In such case, the court will be able to make decisions based on such documents, which will help resolve the disputes faster. 7.6. Dispute Regarding the Price of Buy-Out of a Land Plot, Real Estate, and the Reimbursement Amount General Description of the Risk Situation The procedure used to determine the buyout price is specified in section 5 of the Law of Ukraine “On Alienation of Privately Owned Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Necessity”. However, this article only defines the general provisions, without a mechanism to make them more specific. The buyout price includes the prices of the land plot (or a part thereof), residential house, other building and structures, and perennial plantings located thereon, taking into account the damage inflicted on the owner due to the buy-out of the land plot, including the full amount of losses inflicted on the owner due to early termination of its obligations to the third parties, including lost profit. Potential Consequences of the Risk Situation The general nature of the legislative provisions regulating the establishment of the buyout price may result in numerous court disputes regarding the amount of the established buyout price or amount of lost profit. Assessment of Risks from the Standpoint of the Public and Private Partners The payment of the buyout price is the responsibility of the public partner. The funding sources are determined according to the terms of concession. In the absence of a technique to determine the buyout price and a technique to determine the lost profit, there is a risk of disputes regarding the amount of reimbursement. Risk Management Mechanisms When determining separate components of the buyout price, the already developed techniques should be adhered to.
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Recommendation A technique to determine the buyout price of the land plot will have to be developed and approved. It would be reasonable to develop a technique to determine the lost profit separately. Such techniques are developed and approved by Resolutions of the Cabinet of Ministers of Ukraine. In case the use of a technique infringes the citizens’ rights, it may be amended. 7.7. Absence of guarantees of seizure of land plots from private ownership General Description of the Risk Situation The procedure of seizure of a land plots from private ownership makes the State Agency for Investment and National Projects the initiator of land plot seizure applying to Kyiv Oblast State Administration for selection of the placement location. Kyiv Oblast State Administration, which is not a party to the concession agreement, determines the possibility of allocating land plots based on conclusions of other agencies. At the same time, in case land plots are located within populated areas, the issue will be also reviewed by local self-governance bodies (village, settlement, or city councils). Potential Consequences of the Risk Situation The local self-governance bodies may delay the procedures required to seize land plots from private ownership. Assessment of Risks from the Standpoint of the Public and Private Partners Local self-governance bodies (village, settlement, or city councils) may delay the seizure of land plots from private ownership in case of, and in view of, the unpopularity of such measures among the citizens residing on the territory of the local community. Risk Management Mechanisms Risk management is possible by reaching an agreement among all interested parties and creating the conditions for the local self-governance bodies to be interested in the project implementation. However, such agreement is not documented in the course of concession. Resolving this issue may require entering into additional agreements for implementation of the project (including investment projects), which it would be reasonable to consider when entering into the concession agreement. Recommendation Provide for the possibility of entering into agreements involving the private and public partners and the local self-governance bodies under the concession agreement and PPP which would establish obligations for development of infrastructure before the stage of decision making for seizure of land plots. This will make it possible to take into account the interests of the communities when implementing the project and make the implementation faster. It is also possible to develop a simplified procedure for seizure of land plots, which would not involve the local self-governance bodies in the relations between the state (as represented by the State Agency for Investment and National Projects), which seizes the land plots, and private owners. 7.8. Obligation of reimbursement of damage under the lease agreements of private owners of land plots General Description of the Risk Situation The law does not specify which party is responsible for terminating a lease agreement: the previous owner or the government agencies (local self-governance bodies) that bought out (seized) the land plot.
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Potential Consequences of the Risk Situation There is a possibility of situation in which the lessee would appeal against the termination of the lease agreement in court. Assessment of Risks from the Standpoint of the Public and Private Partners There is no risk of justified objections from the lessee against the private partner. The lessee may assert both property claims and appeals against the seizure of the land plot against the Kyiv Oblast State Administration, State Agency for Investment and National Projects, and the previous owner. Risk Management Mechanisms Kyiv Oblast State Administration engages owners, lessees, and other persons that may have rights to the land plots, in negotiations regarding the land plot buyout. However, this does not guarantee agreement on all matters. Recommendation A provision should be made in the Law of Ukraine “On Alienation of Land Plots and Other Real Property Located Thereon for Social Needs or on the Grounds of Social Necessity” of November 17, 2009, No. 1559 to the effect that the reimbursement to the lessee shall be made within the limits specified in this Law without reimbursement for termination of a lease agreement or for lost profit. A procedure for termination of lease registration based on seizure (buy out) of a land plots from private ownership should be put in place. 7.9. Land shares (units) among the Project land plots General Description of the Risk Situation The law does not provide for the possibility or procedure of seizure of land plots without physical boundaries established. Potential Consequences of the Risk Situation The owner of a land share (unit) may refuse to establish its physical boundaries, which would result in inability to seize it. Assessment of Risks from the Standpoint of the Public and Private Partners The law does not have a procedure for seizure of land shares (units). Therefore, the public partner or other government agencies cannot make decisions on such seizure within their authority. Should it be necessary to allocate land plots without established physical boundaries (land units), the private partner will have to look for ways to stimulate such persons. Risk Management Mechanisms The owner of the land share (unit) has to be persuaded to establish the physical boundaries of a land plot, acquiring ownership of it and securing state registration of ownership. After that, the land plot can be seized from them as the owner. Recommendation It is reasonable to make a provision at the legislative level for forced seizure (buyout) with establishment of physical boundaries of the land plot based on a court resolution with the required registration procedures. The public partner (or Kyiv Oblast State Administration, which is responsible for seizing land plots from owners) should be authorized to initiate action in court for establishment of physical boundaries of land plots from land units. 7.10. Lack of justification of change in the boundaries of wildlife reserve territories
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General Description of the Risk Situation In order to implement the construction project, the status of nature reserve fund first has to be cancelled on the territories of construction. According to article 54 of the Law of Ukraine “On the Nature Reserve Fund”, the boundaries of a wildlife reserve may be changed according to the procedure similar to the procedure of establishment of a wildlife reserve by modifying the boundaries of the wildlife reserve subject to approval by the Ministry of Ecology and Natural Resources of Ukraine based on the respective expert opinion. According to articles 54 and 53 of the said Law, the decisions for change of the boundaries of Ostriv Zhukiv, a wildlife reserve of local importance, have to be made by Kyiv City Council, whereas the decisions for change of the national level wildlife reserves have to be made by the President of Ukraine. Articles 51-53 of the said Law require justification of declaring a territory a part of the nature reserve fund. The Law does not specify whether social necessity or need for the use of land plots for the purposes contradicting the need for protection are taken into account in such justification. Potential Consequences of the Risk Situation The competent bodies may delay the procedures required to change the boundaries of the nature reserve fund, or refuse from such change due to lack of justification for deprivation of the required land plots of the nature reserve status. Assessment of Risks from the Standpoint of the Public and Private Partners The agencies competent to resolve the issue of wildlife reserve boundaries may delay the resolution of the issue due to its unpopularity among the citizens as well as owners and users of wildlife reserve land plots. The grounds for refusal to change the wildlife reserve boundaries may be the lack of justification to deprive the required land plots of the nature reserve status. Risk Management Mechanisms Risk management is possible by reaching an agreement among all interested parties and creating the conditions for the local self-governance bodies to be interested in the project implementation. However, such agreement is not documented in the course of concession. We assume that a compromise is possible, where the land user (concessionaire) would be responsible for preservation of the landscape and ecosystem (restriction of the use of land plots), which may impact the possible options for project implementation in the construction aspect. Recommendation It is reasonable to expand article 54, part 1, of the Law of Ukraine “On the Nature Reserve Fund”, by adding a possibility of justifying the change of boundaries (cancellation of status) of nature reserve territories based on the respective justification of social necessity or social need in addition to the expert opinion. Change in the boundaries of the national importance nature reserve fund may be based on the presence of national interests, and those of local importance – on local community interests. This will allow balancing, at the legislative level, the interests for protection of the nature reserve fund and implementation of socially important projects by opening legal ways to resolve the issue. 7.11. Delayed approvals of surveying documents General Description of the Risk Situation In order to allocate a land plots for lease for Project implementation, surveying documents have to be developed and approved. According to article 7, part 2, paragraph 11 of the Law of Ukraine “On Concessions”, the concessor (State Agency for Investment and National Projects) is responsible for securing the approvals of the allocation project. This allows releasing the private partner from participation in the legal relations regarding the respective administrative procedures in which legal
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equality of the participants cannot be ensured. At the same time, the private partner has limited capabilities of influencing the course of the procedure. Potential Consequences of the Risk Situation In case the surveying documents are not successfully approved, they may require improvements and re-approval. These procedures may take more time than they would in case of active participation of the private partner. Moreover, amendments and approvals of the documents are possible without consent of the private partner. Assessment of Risks from the Standpoint of the Public and Private Partners From the private partner’s standpoint, the public partner has the responsibility to secure the approvals for the surveying documents, whereas there is no mechanism for the private partner to supervise or assist in the performance of this responsibility. From the standpoint of the public partner, it bears all responsibilities to secure the approvals, which protects the private partner from participation in unequal relations. At the same time, the public partner (State Agency for Investment and National Projects) does not have effective means of influence on the government agencies making the decisions, which casts doubt on appropriateness of such division of responsibilities. Risk Management Mechanisms Cooperation for approval of the surveying documents between the public and the private partners, surveying organization, and agencies performing the approval, takes place through negotiations. The law does not provide for a special multilateral procedure of development of the surveying project which would allow engaging the private partner and the design organization in an effective manner for quick amendment of the project and other actions to secure approval. Recommendation This risk is not relevant if the land plot is fully formed as of the time of the concession bidding. In other case, it is reasonable to make amendments to the law, providing for: - the public partner’s capability to delegate some functions of the contracting authority to a private partner; - capability of stipulating in the contractual relations mandatory approval of surveying documents by the private partner; and - simplified procedure for approval of surveying documents developed in the course of PPP implementation. 7.12. No guarantee of receiving land plots for lease General Description of the Risk Situation After the PPP agreement is made, the concessionaire has to enter into lease agreements in order to receive the land plots for use in order to implement the project. According to article 3, part 6, of the Law of Ukraine “On Concessions” No. 997-XIV of July 16, 1999, the ownership right to the respective land plot is exercised by the concessor according to the law. However, the law does not provide for mandatory transfer of the land plot to the concessor by the agency acting as the owner as of the time of the concession agreement. The government agencies and local self-governance bodies disposing of the land plots are not a party in the PPP and make decisions independently according to their competence.
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Potential Consequences of the Risk Situation The project implementation time may not be met for reasons beyond the control of any of the parties to the concession agreement. It is also possible that the project will have to be changed in case of unjustified resistance by the local self-governance bodies. Assessment of Risks from the Standpoint of the Public and Private Partners Under such circumstances, the transfer of land plots for lease may be delayed and the project implementation time may not be met, which is neither in the interests of the private nor the public partner. Moreover, according to article 18, part 2, of the Law of Ukraine “On Concessions” No. 997-XIV of July 16, 1999, execution of the lease agreement is the responsibility of the concessionaire to be performed within one year. Based on a written request from the private partner, this time may be extended, but not more than for one year. Risk Management Mechanisms At the moment, risk management is possible through appeals against the inaction of the government agencies to the superior authorities. In relation to local councils, such appeals are not possible. Recommendation The responsibility of the concessionaire to enter into lease agreements within one year should be cancelled. The lease agreements should be executed within the time provided for in the project and specified in the concession agreement. The agency acting as the owner of the land plots to be granted under the concession should have the obligation to transfer such land plots to the concessor. The concessor should have the obligation to demand such transfer. It is also reasonable to provide for financial liability for disruption of the PPP project implementation time for the government agencies or local self-governance bodies who own the land plots and fail to make the resolutions for transfer of the land plots fit for implementation of the PPP project within the specified time limits. Such liability should be established at least for the case of project implementation under state guarantees, considering the fact that such agencies are not formally involved in the project implementation, however, should be accounted for on the side of the public partner. The agencies should retain the powers to refuse allocating land plots in case it would result in violation of law.
STAGE VI. CRR Design
7.13. Disputes between the concessionaire and the concessor on design issues General Description of the Risk Situation The Law of Ukraine “On Concessions” does not directly provide for the concessionaire’s right to take part in the development of the design documents. According to the Law of Ukraine “On Concessions for Construction and Operation of Motor Roads” No. 1286-XIV of December 14, 1999, the construction of a motor road involves a set of road construction works related to construction, reconstruction, and capital repairs of the motor road, however, does not provide for the concessionaire’s participation in the design and development of the construction project, i. e. excludes the participation of the concessionaire at the stages immediately preceding the construction of the motor road.
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Potential Consequences of the Risk Situation Inconsistencies between the private and the public partners may arise in relation to the engagement of a design organization or approval of specific design decisions. The law does not provide for a procedure to resolve such inconsistencies and does not specify the priority of a certain party’s decision. Assessment of Risks from the Standpoint of the Public and Private Partners The private partner exercises the powers of the contracting authority, which it acquires from the time of receiving the lease of land plots. The powers of the contracting authority include ordering and approving the construction project. Risk Management Mechanisms The law does not directly prohibit the concessionaire’s participation in the development and approval of the motor roads construction project. The concessionaire orders the project and approves it. The procedure for development of the project and selection of the design organization may be agreed upon in the concession agreement. A separate dispute resolution mechanism may also be provided for. Recommendation Article 17 of the Law of Ukraine “On Concessions” should provide for the concessionaire’s right for participation in the development of design documents and right for development and/or engagement of third parties for development of the design documents and design decisions related to the construction of the concession property on initiative of the concessionaire. The Law of Ukraine “On Concessions for Construction and Operation of Motor Roads” should be amended by defining the construction of a motor road as a set of design, research, development, and road construction operations related to the development of a construction project, construction, reconstruction, and capital repairs of a motor road.
STAGE VII. CRR Construction
7.14. Risk of significant change of foreign exchange rate General Description of the Risk Situation A significant change of foreign exchange rate may result in the loss of value of the investments in the Project. Potential Consequences of the Risk Situation In case of a significant devaluation of the investments made, the funding of works and goods required for Project implementation will become impossible. Assessment of Risks from the Standpoint of the Public and Private Partners The impossibility of implementing the project without reconsidering the financial indicators is primarily a risk of the party responsible for the funding of the project. Risk Management Mechanisms The devaluation of investments causing a reduction in the amount of project funding may be resolved by engaging new investments (both on the part of the existing investor and with engagement of new investors), which would require renegotiating the project funding obligations stipulated in the concession agreement. The current concessions law does not provide for a procedure
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of such renegotiation. Probably, such changes would have to be made through a new concession bidding and execution of a new concession agreement. Recommendation In order to be able to provide for the compensation mechanisms in the agreement, the admissibility of such mechanisms has to be stipulated at the legislative level, so that the concessor, as a government agency, is competent to make provisions for them and apply them. The law should provide for the procedure for renegotiation of the terms of the concession agreement in case of a significant change in the funding sources or financial model. 7.15. Concessionaire’s incapability to further perform its obligations General Description of the Risk Situation In case the concessionaire is incapable to further perform its obligations under the concession agreement, the current law does not provide for any mechanisms to resolve the situation other than termination of the agreement. Potential Consequences of the Risk Situation As a result of terminating the agreement, the Project is discontinued and does not achieve its goal. Assessment of Risks from the Standpoint of the Public and Private Partners The private partner cannot engage new (co-)concessionaires on its side for performance of obligations under the concession agreement, or assign its obligations under the concession agreement in order to resolve the issue in a different way. The public partner would have to develop a new project (new feasibility study, etc.) in order to hold the concession agreement bidding procedure in order to complete the construction of the CRR. In such case, as in case with any project, the idle time causes significant financial losses throughout the idle time; besides, the business connections established by the time of default would be lost. Risk Management Mechanisms A possibility of a new entity stepping in with the rights of the concessionaire should be provided for. Recommendation Provisions should be made in the law to allow a new entity stepping in with the rights of the concessionaire without bidding or with a simplified bidding procedure. At the same time, given the fact that the current law does not directly prohibit such procedure, it should be provided for in the bidding documents and terms of the concession agreement. 7.16. CRR nationalization General Description of the Risk Situation Considering the project implementation deadlines, in case significant legislative changes and a respective decision are made, there is a potential risk of nationalization of the CRR after it is commissioned (early termination of the concession agreement). Potential Consequences of the Risk Situation As a result of such risk situation, the concessionaire may lose the possibility to recover the costs sustained and receive income from the operation of the road on the terms of concession. Assessment of Risks from the Standpoint of the Public and Private Partners The risk may exist on the side of the private partner. The public partner, given certain circumstances, may be interested in receiving additional revenue by receiving income from the operation of the CRR. 82 / 81
Risk Management Mechanisms The existing investment protection mechanisms are implemented at the level of bilateral international treaties between Ukraine and the country of the non-resident investor. Recommendation The mechanisms for resolution of the issues related to reimbursement in case of the state’s breach of its obligations should be considered at the stage of agreement execution, and appropriate mechanisms should be stipulated in the concession agreement (if provided for by the international treaty). This would allow evaluating the risk specifically and stipulating the understanding of the amount at risk by each of the parties. It is also advisable to provide for effective mechanisms for protection from legislative changes which deteriorate the conditions of foreign investment, in particular, in the Law of Ukraine “On Foreign Investment Regime”. It would also be advisable to provide for a similar mechanism in the Law of Ukraine “On Concessions” and the Law of Ukraine “On Public-Private Partnership|, especially in the case of engagement non-foreign investments. 7.17. Disruption of Project implementation time due to disputes between the concessionaire and the concessor General Description of the Risk Situation Joint implementation of the Project on the terms of the agreement may give rise to situations of disagreements between the parties of the said agreement (the concessionaire and the concessor). Potential Consequences of the Risk Situation Based on the provisions of the current Ukrainian law, such disputes would have to be resolved through court. However, the court procedure of disputes resolution is not the most effective way of resolving disputes, given the possible court procedure costs, expert investigation costs, legal costs, and representation costs, as well as the time of dispute resolution. Assessment of Risks from the Standpoint of the Public and Private Partners The interests of the private partner may turn out to be less protected in case of judicial resolution of the dispute in Ukrainian courts. On the contrary, the interests of the public partner may turn out to be less protected in case of resolution of the dispute by foreign arbitration institutions. Risk Management Mechanisms In order to resolve most of the issues (the category of the issues may be agreed upon at the stage of negotiation of the final text of the agreement and signature thereof), provisions should be made for the arbitration procedure by a tribunal formed by the representatives of each of the parties from among experts on the respective category of issues. The binding and final nature of such arbitration must be stipulated in the agreement. Recommendation The respective risk should be assessed and regulated at the level of the agreement by making provisions for the formation and performance of arbitration. The general investment conditions in Ukraine may be improved by a reform (of the legislation regulating the court system, and a constitutional reform), which would allow a wider use of the possibility for alternative ways to resolve disputes without a court procedure. 7.18. Failure to procure a construction permit
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General Description of the Risk Situation According to the Law of Ukraine “On Regulation of Urban Development Activities”, the right to perform preparatory operations (unless performed earlier according to a notice or registered declaration about commencement of preparatory operations) and construction operations at the construction facilities of IV and V difficulty class, the connection of the construction facility to the utility networks and structures is allowed for the customer and the general contractor or contractor (if the construction operations are performed without subcontractors) after a construction permit is received. Potential Consequences of the Risk Situation In case of a justified refusal to issue the permit, the customer may amend the deficiencies found in the documents and re-submit them. Assessment of Risks from the Standpoint of the Public and Private Partners Grounds for refusal to issue a construction permit are: - failure to submit the documents required to make the decision on issue of such permit; - inconformity of the documents submitted to the provisions of the law; and - inaccurate information found in the documents submitted. Risk Management Mechanisms A refusal to issue a construction permit may be appealed against in court. In case the project is developed without violations and properly passes the expert assessment, the issue of the permit may be refused in case of improper preparation and submission of documents. In case the state architectural and construction supervision authority does not issue the construction permit within ten working days after the application registration date, or refuses to issue such permit, the contracting authority shall apply to the Ministry of Regional Development, Construction, Housing, and Utilities of Ukraine to take measures related to the issue of the said permit, or refusal to issue it, within ten working days. In case a construction permit or a refusal to issue it are not provided within the period indicated above, the right for construction operations emerges on the tenth working day after the application to the Ministry of Regional Development, Construction, Housing, and Utilities of Ukraine, and the permit is deemed received. Recommendation On condition of submission of the application and documents according to the list of documents provided in the directive of the State Architecture and Construction Inspectorate of Ukraine of March 1, 2013, No. 39, the risk of effective refusal to issue the permit is unlikely. 7.19. Failure of commissioning General Description of the Risk Situation The commissioning of finished construction facilities of IV and V difficulty classes is performed based on the facility completion certificate by issue of a certificate by the state architectural and construction supervision authorities according to the procedure specified by the Cabinet of Ministers of Ukraine. Potential Consequences of the Risk Situation In case the facility fails to pass the commissioning due to inconformity with the design document for construction of such a facility and the provisions of the construction regulations, state standards, and rules, appropriate construction works must be performed in order to bring it to conformity. In case of construction of facilities not specified in the design documents, an obligation arises to tear them down or modify the design documents. 84 / 81
Assessment of Risks from the Standpoint of the Public and Private Partners The resolution for issue (or refusal to issue) a certificate is made by the state architectural and construction supervision authorities within ten working days after the date of submission of the respective documents. The state architectural and construction supervision authority may refuse to issue a certificate on the following grounds: 1) failure to submit the documents required to make the decision on issue of the certificate; 2) inaccurate information found in the documents submitted; 3) inconformity of the facility with the design document for construction of such facility and the provisions of the construction regulations, state standards, and rules. Risk Management Mechanisms The Ukrainian law requires designer supervision and technical supervision of construction. The conditions of designer supervision and technical supervision are established by the current Ukrainian law as well as the respective agreements executed by the construction project owner. Recommendation During the execution of designer supervision and technical supervision agreements, effective mechanisms for supervision of proper performance of the construction operations should be put in place.
STAGE VIII. Road Operation. Distribution of Concession Income.
7.20. Insufficient traffic. Insufficient project funding. General Description of the Risk Situation The intensity of traffic on the motor road may turn out lower than anticipated during the calculation of the Project financial model. Low traffic will result in a reduction of income from the road operation. Article 12 of the Law of Ukraine “On Concessions” provides for the possibility of compensations for concessionaires of unprofitable and low-profit concession properties of high social importance. The procedure for identification of such properties, as well as the terms of provision of compensations, was approved by the Resolution of the Cabinet of Ministers of Ukraine of July 13, 2000, No. 1114 (hereinafter “Procedure 1114”). However, the current law does not make a direct provision for the possibility of reimbursement of the concessionaire’s lost income due to low traffic intensity or for the procedure of provision of such reimbursement. Since Procedure 1114 provides for reimbursements in case of unprofitability of the project and exclusively for socially important concession properties, the possibility of applying its provisions for reimbursements related to low traffic is limited by the criteria of general unprofitability and social importance. Besides, the current law does not define the criteria of social importance of a concession property, and thus there is no guarantee that the competent authorities would deem the motor road a socially important facility. Potential Consequences of the Risk Situation Low intensity of vehicle traffic over the motor road may significantly reduce the estimated income of the concessionaire, which would result in unprofitability of the Project and make it impossible to ensure proper operational quality of the road.
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Risk Management Mechanisms Required legislative amendments: the concession agreement should specify the procedure for reimbursement of the concessionaire’s losses due to low intensity of traffic on the motor road. Recommendation The Laws “On Concessions” and ”On Concessions for Construction and Operation of Motor Roads” should be amended to allow the parties to specify in the concession agreement the procedure of settlement and reimbursement in connection with low traffic intensity on the motor road. It is also necessary to develop the Procedure for reimbursement of the concessionaire’s losses due to low intensity of traffic on the motor road. The concession agreement should specify the conditions for, and procedure of, reimbursement by the concessor of the concessionaire’s losses connected with low traffic intensity on the motor roads. 7.21. Road operation costs overrun General Description of the Risk Situation In the course of motor road operation, additional costs may be incurred in order to maintain its proper functioning. The road operation costs may turn out higher than estimated. Potential Consequences of the Risk Situation The motor road operation costs overrun and lack of funds to cover it may make it impossible to ensure proper operational quality of the road. Risk Management Mechanisms Establishing a special fund to guarantee the coverage of road operation costs in case of costs overrun. Change of the road toll. Recommendation The concession agreement should provide for a special reserve fund to cover the costs related to motor road operation costs overrun. The concession agreement should provide for the possibility of a joint application of the parties to the authorized agency (the Cabinet of Ministers of Ukraine) with a request to increase the maximum road toll in the cases specified in the agreement. 7.22. Impossibility to credit the road toll to the concessionaire’s account General Description of the Risk Situation According to the law, the concessionaire is entitled to income from the operation of the motor road granted under a concession. According to article 4 of the Law of Ukraine “On Concessions for Construction and Operation of Motor Roads”, the road toll is one of the sources of the concessionaire's income. However, article 29 of the Law of Ukraine “On Motor Roads” states that the road toll is to be paid to the State Budget of Ukraine. Potential Consequences of the Risk Situation Given the above provision of the Law of Ukraine “On Motor Roads”, until the law is amended, the concessionaire will not be able to charge the road toll independently and include it in its income. This creates obvious limitations for the concessionaire’s income from the Project.
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Risk Management Mechanisms The Law of Ukraine “On Motor Roads” should be amended. Until changes are made, the road toll should be indirectly included credited to the concessionaire’s income after being credited to the budget. Recommendation Amendments to article 29 of the Law of Ukraine “On Motor Roads” should be initiated to provide that the road toll on paid motor roads constructed using the funds acquired by the concessionaire according to the concession agreement and/or another respective agreement shall be credited to the concessionaire’s account and used both to maintain the proper technical condition of the motor roads and comply with the terms of the respective agreements of the concessioner, as well as for other purposes determined by the concessionaire according to the concession agreement. The concession agreement should provide for a procedure which would allow transferring (returning) to the concessionaire the road toll collected by it after previously crediting it to the state budget, with participation of the organization authorized to manage the state budget costs (Ukravtodor), if necessary. 7.23. Devaluation of the currency of road toll General Description of the Risk Situation The local currency in which the road toll is collected may decrease in value as compared to the currency in which the Project is funded by the concessionaire’s creditors. Potential Consequences of the Risk Situation The devaluation of the currency in which the income from road operation is received as compared to the currency in which the project is funded will make the Project less profitable for the concessionaire. This may result in unprofitability of the Project and, as a result, bankruptcy of the concessionaire. Risk Management Mechanisms Introduction of contractual mechanisms for coverage of the costs related to currency devaluation. Recommendation The concession agreement should provide for mechanisms allowing to reduce the losses due to the devaluation of the local currency, in particular by allowing, and establishing the procedure of, an increase of the road toll in order to offset such losses, or by requiring the concessor to reimburse the concessionaire’s losses due to devaluation of the local currency. 7.24. Regulatory changes unfavorable for the Project. Deterioration of tax conditions General Description of the Risk Situation There is a risk that legislation will be passed with provisions unfavorable for the concessionaire, in particular those that would increase the concessionaire’s costs or reduce its income related to the operation of the motor road. According to the Law of Ukraine “On Concessions”, legislative amendments must not deteriorate the conditions for the concessionaires’ activity for implementation of projects on the terms of concession. However, according to article 20 of the Law of Ukraine “On Public-Private Partnership”, the guarantees related to the prohibition of deterioration of conditions provided by the law do not apply to the legislative provisions on defense, national security, maintenance of public order, environment protection, standards of quality of goods (works, services), tax, currency, and customs law, licensing
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laws and other laws regulating legal relations where the principles of equality of parties (public and private partners) do not apply. Besides, the Association Agreement between Ukraine and the European Union, European Atomic Energy Community, and their member states, fully signed on June 27, 2014, requires gradual harmonization of the existing Ukrainian standards and policies in the sphere of transportation with the European ones. The list of EU and EEC directives and regulations on transportation, as well as the time for harmonization of the Ukrainian law with their provisions, are provided in Annex XXXII to Chapter 7 of the Association Agreement. According to this Annex, Ukraine must harmonize its legislation to several dozens of European directives and regulations within a period of 1 to 8 years. The harmonization of the Ukrainian standards with the European ones may increase the concessionaire’s costs required to ensure the conformity of the CRR with the European standards. Potential Consequences of the Risk Situation Legislative amendments causing a reduction of income or increase of costs of the concessionaire will make the Project less profitable for the concessionaire. This may result in unprofitability of the Project and, as a result, bankruptcy of the concessionaire. Risk Management Mechanisms Making provisions in the concession agreement for a mechanism for reimbursement of losses caused by deterioration of legislative conditions. Recommendation The concession agreement should provide for the concessor’s obligation to reimburse the concessionaire for the losses caused by application of laws deteriorating the conditions for the concessionaire as compared to those established as of the time of the concession agreement. The bidding documents of the Project should establish that the bidders must take into account the requirement to ensure the conformity of the CRR with the EU standards to be introduced in Ukraine in the course of Project development. 7.25. Unfavorable actions of authorized agencies (traffic police, Ukravtodor) in relation to road traffic management General Description of the Risk Situation The law entrusts the government agencies and organizations (traffic police and Ukravtodor) to supervise and control the traffic on motor roads. The exercise of such authority makes it possible for such agencies and organizations to take actions and measures unfavorable for the Project (installing traffic signs, establishing speed limits, traffic restrictions, etc.). Potential Consequences of the Risk Situation The actions and measures taken by the authorized agencies while performing supervisory functions may cause losses for the concessionaire and deteriorate the road operation conditions. Risk Management Mechanisms Participation of the concessor in the resolution of issues with the authorized agencies and organizations in the spheres of traffic and road system. Recommendation The agreement should provide for participation of the concessor on the side of the concessionaire in the resolution of issues with the authorized agencies and organizations in the spheres of traffic and road system.
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STAGE IX. Concessionaire’s transfer of the road to the concessor after the completion of the Project
7.26. Undefined procedure for return of the motor road General Description of the Risk Situation According to the law, after the concession agreement expires, the concessionaire must transfer the motor road to the concessor. At the same time, the law does not establish a clear procedure for return and acceptance of the motor road or transfer of other facilities created in the course of the concession project, and does not provide for the possibility of returning or transferring them to a third party. Potential Consequences of the Risk Situation The lack of a specified procedure for return of the motor road or transfer of other facilities created in the course of the concession project, as well as the undefined time when the road and the respective facilities are deemed transferred, create a possibility of avoiding the transfer or acceptance of the same. The absence of a provision allowing to transfer the motor road and other facilities to a third party instead of the concessor makes it necessary to transfer them to the concessor even in the case when the concessor is not interested or authorized to recognize such facilities on its balance sheet. Risk Management Mechanisms Detailed and clear contractual regulation of the procedure, conditions, and deadlines for return of a motor road granted under a concession, and transfer of other facilities created in the course of implementation of the concession project. Legislative amendments. Recommendation The Law of Ukraine “On Concessions for Construction and Operation of Motor Roads” should include a provision that the procedure for return of the motor roads and other facilities created in the course of the concession project shall be determined by the parties in the concession agreement; additionally, a provision should be made allowing the possibility of transfer of the motor road and the respective facilities to a third party in cases specified by the law or the agreement. The concession agreement should specify the procedure of return of the motor road and other facilities by concessionaire, with indication of the entity receiving the CRR on its balance sheet after the completion of the Project (Ukravtodor structure).
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