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Role of PPP in Rebuilding Ukraine
Since 24 February, 2022 Ukraine has received considerable support from its partners to withstand this wartime period. But while military requirements remain at the centre of attention, another massive challenge comes into the picture – the necessity to rebuild Ukrainian real estate and infrastructure.
As of August 2022, according to Kyiv School of Economics data, the total value of damage and destruction caused to real estate and infrastructure came to USD 113.5 billion. While damage to infrastructure comes in second totalling USD 35.1 billion, damage caused to residential real estate has reached USD 47.8 billion.
Furthermore, 7 out of 13 Ukrainian seaports are under blockade or occupation, including Olvia and Kherson seaports, where ongoing concession projects were in progress.
While the Armed Forces of Ukraine carried out their counter-offensive and pushed invaders back, business associations and the Ukrainian Government have already begun working on establishing a strong foundation for the upcoming rebuilding. And one of the key instruments of how Ukraine plans to restore its infrastructure is public-private partnerships (PPP).
Ukraine has limited resources to effectively implement a reconstruction program on its own. Thus, the role of the private sector becomes much more significant when put into a rebuilding perspective. In light of this, the National Investment Council of Ukraine has, together with Ukrainian and foreign advisors, business and government representatives, developed a Law registered in the Ukrainian Parliament under No. 7508 On Amendments to Certain Legislative Acts of Ukraine to Improve the Mechanism of Private Investments Attracted under the Public-Private Partnership Mechanism to Accelerate Restoration of Objects Destroyed by War and Construction of New Objects Related to Post-war Rebuilding of Ukrainian Economy” (Law No. 7508).
Law No. 7508 is a massive piece of work that pursues three key goals, namely to:
- simplify the applicability of PPP to post-war rebuilding;
- further improve the PPP legal framework; and
- maximise the effectiveness of PPP procedures in general terms.
In our article, we will focus primarily on the first point, namely, what solution Law No.7508 offers for post-war rebuilding using the PPP framework.
Rework in Progress
Law No. 7508 provides a much shorter and simpler PPP procedure for projects that are part of rebuilding of war-damaged assets. Still, the simplified procedure will only apply to those projects included in lists compiled on state and municipal rebuilding PPP projects.
In order to compile such lists, the Ministry of Economy of Ukraine will establish a standing commission consisting of representatives of the Ministry of Economy, IFIs, donors, experts, and the State Organisation Agency for Support of Public-Private Partnerships.
So as to carry out a PPP project under the simplified procedure, a state authority needs to prepare a short description of the rebuilding project. Such description should, among other things, contain a pre-feasibility study of the project in question. Then the authority submits the description for review to the Commission.
After the review, the Commission files its recommendation on whether to include the project in the state list of rebuilding PPP projects to the Ministry of Economy of Ukraine which, in its turn, submits the relevant application to the Government. After that, the Government includes the project in the list of state PPP projects on rebuilding (State List).
Presumably, providing a simplified procedure for PPP project implementation will incentivise the authorities to submit the projects on rebuilding for inclusion in the lists. We expect that after Law No. 7508 is adopted and comes into force, the State List will be formed within a few months and will contain dozens of infrastructure projects on the rebuilding of roads, bridges, overpasses, seaports, airports, and other infrastructure.
After the project is included in the State List, the development of a feasibility study and analysis of the effectiveness of a PPP project are not required. Instead, the relevant state partner under the project should start developing project documentation immediately after the project is included in the State List. The budget for the project may be based on similar construction project examples.
A standing sectoral commission needs to be established to organise tenders for the PPP projects on rebuilding (Sectoral Commission). The Sectoral Commission will be established by either the Ministry of Defence of Ukraine – for PPP projects related to national defence matters, the Ministry of Infrastructure of Ukraine – if the PPP project is related to infrastructure, or the Ministry of Economy – for other sectors of the economy. The Sectoral Commission will consist of representatives from the state partner, a relevant ministry that established the Sectoral Commission, the PPP Agency, the Ministry of Finance of Ukraine, IFIs, experts plus representatives from the Ministry of Economy.
The relevant Sectoral Commission is responsible for analysis of market interest in the project, approval of the qualification criteria for tender participants and the tender documentation, review of applications, and acts in general terms as the organiser of the PPP tender.
To speed up the tender preparation process, the Ministry of Economy should also approve standard tender documentation, including a standard PPP agreement.
Another significant proposition provided by Draft Bill 7508 is a short list of qualified participants (Short List). The Sectoral Commission groups together several similar PPP projects where the same qualification criteria are applied to the participants of a tender. The Sectoral Commission may then select participants to the Short List for this group of PPP projects. General information about the projects included in the group will be accessible to the public.
Potential participants may file the required documents to the Sectoral Commission for review, and if a participant meets the qualification criteria, it will be included in the Short List. Such investors will then skip the pre-qualification stage described next for each project of the group.
Before announcing the tender, the Sectoral Commission conducts a market interest study (Study), which serves as a pre-qualification stage. To perform the Study, the Sectoral Commission publishes an announcement about the intention to conduct the PPP tender for a certain project that also includes information about the state partner, qualification criteria for participants, project tender documentation, and the form of compensation for the private partner’s expenses – PPP grants, state co-financing, tolls/payments for services, availability payments. Any interested investor may submit an application for the PPP tender to the Sectoral Commission, which then conducts their pre-qualification.
If there are at least three interested investors who passed the Study or three investors from the Short List for the project have stated their intention to participate in the PPP tender, the Sectoral Commission announces the PPP tender.
In the second stage of the tender, the qualified participants submit their bids, which consist of technical and financial sections.
The technical section of the bid may be assessed on the basis of the relevancy and effectiveness of technical solutions, compliance with ecological standards, quality of the proposed services, etc. However, the financial section will be assessed from several standpoints, particularly with regard to the proposed financing mechanism, NPV of the payments to be made under the PPP agreement (e.g., availability payments, grants), price of the construction and/or services/goods that will be provided, etc.
Bids will be assessed in two stages – from the technical and financial perspectives. Each bid will receive its score as a result of the assessment. The bid with the highest score wins the tender. Under the general rule, the winner and the state partner then have 90 days to negotiate and sign the PPP agreement.
Another change envisaged by Law No. 7508 is explicit permission to govern by foreign law any other agreements related to the PPP project (e.g., financing or direct agreements). At present such provision is only provided in the Law of Ukraine On Concession, thereby not covering any other PPP agreements. Additionally, Law No. 7508 introduces the possibility of the state partner waiving sovereign immunity under the direct agreement subject to approval from the Ministry of Finance of Ukraine. Once these provisions are enacted into law they will help investors during negotiations on the terms of the PPP agreement.
Rebuilding infrastructure effectively
As stated above, Law No. 7508 is an extensive document that amends almost every aspect of the PPP framework. However, its primary purpose is to provide an effective, reliable and swift mechanism for application of the PPP framework in order to restore assets damaged as a result of war.
The simplified procedure offers effectiveness by establishing special bodies responsible for PPP tenders and the implementation of projects, reliability by describing scrupulously each step of preparation for the PPP tender, and swiftness by setting tight deadlines and removing certain steps completely. Under the current law in effect now, initiating a tender and signing a PPP agreement takes nearly two years. The simplified procedure cuts this term significantly and enables performance of the tender and signing of the agreement on good terms in less than one year.
Still, some changes are debatable. In particular, removing the feasibility study as a pre-requirement for the decision to perform the PPP tender may lower the level of interest in such PPP projects among investors. The absence of a complete feasibility study means that less homework is done by the authorities to prepare for the PPP project. As a result, the risk that the project may be found not feasible increases.
Taking into consideration the fact that once the war ends and Ukraine’s partners shift their financial support to post-war restoration projects, the PPP framework may be one of the best options for foreign investors. However, Law No. 7508 itself cannot address the issue of financing of upcoming PPP projects. The Budget Code of Ukraine needs to be further amended with the involvement of IFIs and experts to provide a transparent and effective mechanism of financial guarantees for investors and lenders under PPP projects. Besides, a risks insurance mechanism for the stakeholders of a PPP project must be developed should the war in Ukraine resume in the future. Without valid guarantees it will be much harder to attract private investors to the process of rebuilding Ukraine.