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Ruslan Redka: PPP development in the construction of Ukrainian roads

cropPublic and private partnership (PPP) in Ukraine has been developing in a few areas, such as construction, roads’ maintenance and reconstruction. The government’s involvement of a private capital in socially important areas is a fairly common practice in the world. Transport infrastructure is one of the industries in which public and private partnerships (PPP) are often resorted to.

Ukraine can’t boast so far of its vast experience in PPP, however, we may observe this mechanism’s application in construction, roads maintenance and reconstruction, in particular.

Challenges of PPP implementation in Ukraine

According to the Ministry of Economic Development and Trade of Ukraine, 17 projects are being implemented on PPP principles accounting for 7% of all concluded agreements in the field of construction and/or maintenance of highways, roads, railways, airfield runways, bridges, overhead roads, tunnels and subways, sea and river ports and their infrastructure.

It would be possible to solve the ‘fools and roads’ problem, but there are no ‘fools’ among the bureaucracy. The fact is that this industry is a goldmine for officials at all levels, since you cannot control many aspects, and there are a lot of opportunities to dispose of budget money, such as saving on materials, technologies violation, drafting estimates with deliberately exaggerated distances and cost figures, saving on labour, equipment and fuel, roadway narrowing, etc.

The result of such work is substandard and short-lived. Thus, annual road repair turns into highly profitable and sustainable business.

The average pavement construction cost is $3-4 mln/1 km

As for road construction, the things are more complicated here. The average construction pavement cost is $3-4 mln/1 km for the state with budget deficit it is rather challenging to allocate funds for construction of new highways.

For example, in 2018 44 billion UAH were allocated for road infrastructure.

Simple calculations show that these funds would be enough to build about 400 km of new roads, however, a significant portion of this money will be spent on road repair, and some will settle in the pockets of officials.

Permanent budget funds deficit for high-cost infrastructure projects which, in turn, are necessary to ensure social needs and economic development is a prerequisite for attracting international loans as well as PPP development.

In the Ukrainian practice emerging relationship with PPP elements get formalized with the signing of one of the agreements: concession, lease of state or municipal property, leasing, investments, property management, commissions, orders, procurement of goods, works or services paid by the state or local budgets, agreements for joint activities. Or, using the right of freedom to enter into an agreement, the parties may conclude a PPP agreement that contains elements of some of the aforementioned agreements.

First attempts to attract private capital into transport infrastructure of the country were made in 1998 with the launch of construction works of the first Lviv – Krakovets concession road. After the contest in 1999 with the domestic investor, the Lviv consortium “Concession Transport Trunks”, the concession agreement was signed, which subject was the construction and operation of 84 km of road for 45 years. However, this project cannot be considered to be successful, since its implementation is still at an early stage.

Under the State program of public roads development for 2005-2010, a pilot project for construction of Kharkiv – Dnipropetrovsk toll road segment with the length of 118,1 km with the use of PPP mechanism has been developed, as well as investment proposals under PPP for 11 road infrastructure facilities, including South Trans-European Motorway “Western border of Ukraine” (Kosiny village) – Kyiv.

The most notable improvement of country’s major highways was the construction and reconstruction of roads before carrying out Euro-2012 in Ukraine. At that time, the task was handled with the assistance. Foreign contractors were also involved for this project’s implementation. But we cannot call this project an example of successful PPP implementation, since at the initial stage it was planned to finance not more than 52% of all scheduled works at the expense of state and local budgets. Due to the difficulties in attracting private investment, the government had to finance more than 80% of all costs.

Mutual benefit and risks

PPP is mutually beneficial and each party gets its benefits. For the government PPP means reduction of costs for services provision, investment activities intensification, efficient management of assets, risk-sharing optimization, the expertise of private partners, budget savings, improving the state infrastructure, preservation of jobs.

A private partner gains access to previously closed economy sectors, acquires the possibility of obtaining soft loans, raising the project’s status due to state partner’s participation, sharing risks, improving the company’s image, facilitation of interaction with public authorities.

PPP for a private partner-investor has always been associated with a risk, especially due to the specific character of the other party, the state. Since PPP means long-term projects, a private partner bears the risk of amendments introduced to legislation and is subject to political risks: international sanctions, a change in the political vector of country’s development, the political environment. A private partner assumes also the risks associated with incorrect calculation of incomes and expenditures of project implementation and inflation. Risks associated with the ownership, use and management of PPP facility. For example, damage due to natural disaster, fire, destruction of the facility or its intentional/unintentional damage.

In the Ukrainian realities a partnership with government has some negative moments as well, along with benefits, such as state guarantees and balancers.

Among other things, deficiencies in the national regulatory framework, over-regulation of procedures, lack of clear guarantees of compensation payments to private partners in the case of failure of the government to fulfill its obligations under the concluded agreements, the refund of rate difference, etc., inhibit the PPP development in Ukraine.

The lion’s share of investment in PPP projects come from foreign investors. At the same time, poorly developed legislation in PPP field, high level of corruption in the country, unstable political and economic situation, ATO, administrative barriers and lack of tax incentives, especially for implementation of low-income social projects, complicated system of obtaining coordination documentation, all these facts do not contribute to foreign investors’ intent to invest in PPP projects.

PPP efficiency – what do we need to achieve this?

For PPP’s successful operation in Ukraine, which has been working efficiently all over the world, we need to improve the regulatory framework, taking into account the interests and protection of private partners’ rights:

  • To reduce the number of coordination procedures at the contracting stage.
  • To provide a mechanism for compensation of losses in the case of non-compliance with the terms and conditions of the agreements or their termination.
  • To introduce the provision of incentives for private partners in the implementation of socially significant projects.

The PPP mechanism requires promotion, especially in the regions. Involvement of public organizations, representatives of the media and the public in the development of PPP projects will help to identify areas being in need of private capital and will attract potential investors.

Ruslan Redka, Juscutum JSC’ corporate law practices partner