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Counsel, Head of Real Estate and Infrastructure practice, AVELLUM
New Life of Concession Agreements in Ukraine
The Law of Ukraine On Concession No. 155-IX came into effect on 21 October 2019. This new piece of legislation finally enabled the Ukrainian model of a PPP to get an update. It took more than two years to adopt the Law on Concession and its final version had a few minor changes compared to the first draft submitted to the Ukrainian Parliament in early 2018,.
A month before this new law came into force, in September 2019, the Ukrainian Government announced two pilot tenders for concession of the Olvia and Kherson Sea Ports.
In January 2020, the Qatar port operator QTerminals, and Risoil-Kherson, the consortium of Peter Oil and Chemicals and Risoil S.A., were granted concessions for Olvia and Kherson Sea Ports, respectively. QTerminals reportedly intends to invest about USD 124 million in the first five years, while Risoil-Kherson intends to invest around USD 11 million within the first four years of the project’s implementation.
As of now, both companies have received permits from the Antimonopoly Committee of Ukraine and entered the concession agreement negotiations stage.
In this article, we will analyse the general framework for the Concession Agreement and delve into some peculiarities of land allotment for concession purposes, title to a real estate concession object and liability for failing to commission it, social development contributions, and movable assets.
The Draft CAs for the Olvia and Kherson Sea Ports had been prepared before the Law On Concession was adopted. Thus, the Government prepared the Draft CAs based on the previously effective laws on PPPs.
According to the Law On Concession:
– the CA must include 18 mandatory provisions, absence of which may lead to the CA’s invalidation;
– the parties to the CA have the right to independently choose the venue and the procedure for dispute resolution. Additionally, Ukraine may, as a state, waive its sovereign immunity with regard to any arbitral awards or court judgements passed against it under the CA; and
– the CA may be governed by foreign law.
Given that provisions of the Law On Concession may apply to Draft CAs, we anticipate that the parties to Draft CAs will amend them respectively to ensure their compliance with the Law On Concession.
Pursuant to the Law On Concession, when the object is transferred into concession, the asset holder of the object automatically loses its title to the land plot beneath the object.
The Draft CAs go one step further, providing that the grantor should (i) facilitate this procedure by approving the Asset Holder’s waiver of the title to the land plots and (ii) ensure that the Asset Holder complies with legislation while waiving the title to the land plots.
A concessionaire may obtain the lease right to the state and municipal land plots needed for the concession project without an auction.
On the one hand, the Law On Concession obliges authorities responsible for the allotment of Land Plots to transfer the Land Plots into the concessionaire’s lease. Moreover, according to the Draft CAs, the grantors will request these authorities to lease out the Land Plots to the concessionaires.
On the other hand, the authorities may still, at their own discretion, either provide the concessionaire with the lease right to the Land Plots or not do so. According to Ukrainian laws, the authorities are not held liable for failing to fulfil the obligation to transfer the Land Plots into the concessionaire’s lease, thereby turning such an obligation into a declarative one.
The grantor (save for the cases when the grantor disposes of the Land Plots) cannot influence the decisions of the authorities to allot the Land Plots to the concessionaire. Therefore, it is highly unlikely that the concessionaire will be able to unilaterally terminate the CA in the event of failure to obtain the lease to the Land Plots within one year from execution of the CA since the grantor cannot be held responsible for this.
Title to the Object and Liability for Failing to Commission IT
Transfer of the object to the concessionaire and its further reconstruction or improvement does not change the fact that the state or the territorial community continues to own such object.
Any new objects built by the concessionaire will be owned by the state or municipal authorities, respectively.
According to Draft CAs, the concessionaires will build a number of objects and commission them. Consequently, the concessionaires will:
– register the state or municipal authorities’ ownership right to the newly-built objects in the State Register of Proprietary Rights to Immovable Property and
– register their right of use and possession over the above objects in the Register.
The concessionaire records the object on its balance sheet and returns it to the grantor once the CA is terminated.
Under Draft CAs, if the concessionaires use constructed objects without commissioning of the same, the grantors will be entitled to claim 500% of the concession fee applied to the revenue received from operation of such objects. And if the concessionaires fail to commission the constructed objects within 360 calendar days from the date they should have been commissioned, the grantors may terminate the Draft CAs early.
Social Development Contributions
Developers are obliged to contribute to the development of social infrastructure in order to commission the constructed object. Local self-government authorities set the amount of such contributions which:
– prior to 1 January 2020, could not exceed 10% of the construction value for non-residential real estate;
– in 2020, may not exceed 4% of the construction value for non-residential real estate.
Social development contributions for developers will be abolished from 1 January 2021.
However, Draft CAs prescribe that the concessionaires will pay 5% of the construction value as a contribution to the development of social infrastructure irrespective of the above legislative changes.
According to the annexes to the Draft CAs, concession objects consist of hundreds of real estate and movable property items. These assets were transferred to the concessionaire for a symbolic price of UAH 1,000 (approx. USD 35).
At the same time, a joint inventory commission composed of representatives of the grantor, concessionaire, Asset Holder and Ukrainian Sea Port Authority conducts an inventory check of all the property owned by the Asset Holder. If such inventory check spots assets, which are not listed in the annexes to the Draft CAs, the concessionaire is obliged to purchase them at the price determined by the inventory commission.
The Draft CAs establish that upon termination of the CA, the concessionaire must return all movable assets into state ownership without any compensation. This means that all the machinery, transport, instruments, software, furniture, etc. purchased by the concessionaire will, in order to implement the project, be transferred into state ownership for free.
Summing up the above, we would like to note that it is a great achievement for Ukraine to hold two pilot concession tenders in a transparent manner and in line with best international practices. Once the parties execute the CAs, they will send a clear message to the business community encouraging it to invest in Ukrainian infrastructure. We recommend that you keep an eye on further PPPs developments in Ukraine.
¹M. Maksymenko, R. Khmelnytskyy. Will the New Draft Law On Concessions Trigger a Flurry of Investment into Ukraine? / Ukrainian Law Firms 2018. A Handbook for Foreign Clients // [Electronic source]. — Access mode: http://ukrainianlawfirms.com/reviews/infrastructure/
²M. Maksymenko, R. Khmelnytskyy. Implementation of Effective Concession Mechanisms / Ukrainian Law Firms 2019. A Handbook for Foreign Clients // [Electronic source]. — Access mode: http://ukrainianlawfirms.com/reviews/infrastructure/
³Our analysis was conducted on 3 April 2020.
4The concession laws effective when the Draft CAs were prepared contained a different list of mandatory provisions for a CA than the one set out in the Law On Concession.
5Parties to Draft CAs agreed to resolve their disputes through arbitration in accordance with the Rules of Arbitration of the ICC.
6Ukraine waived its sovereign immunity under the Draft CAs.
7Draft CAs are governed by the laws of Ukraine.