Implementation of Effective Concession Mechanisms

According to the Ukrainian Ministry of Infrastructure¹, the country needs more than USD 30 billion to modernize the country’s existing infrastructure.

With that in mind, an entire year was not enough to thoroughly develop and adopt new concession legislation², which is vital for attracting the necessary investment. However, it would be rather unfair to claim that nothing was done in this respect. The Ukrainian Parliament passed Draft Law No.8125 On Amendment to Certain Legislative Acts of Ukraine on Regulation of Concession Activity for Involvement of Private Sector in Implementation of Public-Private Partnership, Including Concession, with Infrastructure Modernisation Purposes in the first reading, yet the draft law remained at the same stage, without any promise for a bright future.

Having already analysed the ge­ne­ral aspects of the Draft Law³, this ar­­ticle will primarily focus on the ma­jor obstacles on the path to its approval.

Managing Disconnection between
Concession and Land Legislation

Absence of effective legislation deems concession impracticable, as there will be no guarantee that the concessionaire will obtain title to a land plot, required for their activities.

The Draft Law proposes to solve the above land issue by doing the following:

1. terminating the right of permanent land use of a state or municipal company from the moment when a real estate object, which is located on such land plot, is transferred into a concession;

2. terminating the private land lease right in the event that a grantor adopts a decision regarding the use of the leased land plot for concession purposes;

3. providing for the possibility of unilateral compulsory alienation of a private land plot on the grounds of social necessity;

4. obliging the person, who holds title to the land plot, to delegate their developer’s functions to a concessionaire, enabling the concessionaire to construct and maintain roads without the need to obtain rights to land plots beneath the planned construction object; and

5. providing the concessionaire with the right of a concession’s unilateral termination if they do not obtain a title to a land plot(s) within 9 months from the date of the concession’s execution.

It should be noted that the first 3 suggested points are rather controversial when it comes to protecting the rights of third parties, as rights guaranteed by Article 1 of Protocol No. 1 to the European Convention on Human Rights.

Moreover, point 2 is inconsistent with existing Ukrainian legislation, whilst points 3 and 4 clash directly with the Constitution of Ukraine, effectively providing for expropriation of land plots.

As a result of the analysis, we suggest revising the Draft Law to ensure the following:

— termination of the private lease by operation of law should not be considered an option, even if the grantor decides to use the leased land plot for concession purposes;

— the compulsory alienation of a private land plot must be conducted only through a court procedure;

— public necessity must be the only ground for the compulsory alienation of a private land plot, since not many concession projects comply with the public necessity characteristics; and

— a person holding a title to a land plot must not be obliged to delegate their developer’s functions to the concessionaire.

If the above suggestions are implemented, the potential risk exists that the concessionaire will face a considerably greater amount of time on the procedure for obtaining a title to the land plot in the short-term perspective.

However, with regard to a mid and long-term perspective, concessionaires will protect themselves sufficiently from any possible threats and challenges by landowners or users, whose rights were ­violated.

Transfer of Rights under the Concession Agreement

The Draft Law envisages that the concessionaire may register property rights to the concession object as the right of pos­session and the right of use (“Property Rights”) based on the transfer of the concession object to the concessionaire or the construction of concession object by the concessio­naire.

Despite the fact that it sounds great in theory, as of today, there is no precedent of Property Rights registration (in respect to any real estate object) in the Real Estate Register.

According to the Draft Law, the concessionaire may mortgage the right of claim under the concession agreement (“CA”) in favour of a creditor by mortgaging Property Rights.

Considering that the mortgage of Property Rights and pledge of the right of claim are two absolutely separate security instruments with different legal regulations, the transfer mechanism of rights under the CA, as proposed by the Draft Law, may be impracticable.

We suggest amending the Draft Law by either dividing the above mechanisms of transfer of rights under the CA (pledge or mortgage) and leaving only the preferred one, or defining both options as separate possible collaterals with different scopes and enforcement procedures.

Moreover, we believe that additional amendments should be made to the provisions of the Draft Law on the replacement of the concessionaire, since they are rather contradictory:

— on the one hand, a creditor may enforce the right of claim under the CA and, in so doing, replace the concessionaire in the CA, while

— on the other hand, the Draft Law prescribes that replacement of the concessionaire (even within enforcement procedure) should be carried out through a tender.

Jurisdiction of Dispute Resolution

The Draft Law stipulates that administrative courts should consider disputes on feasibility studies and concession tenders, while commercial courts should consider disputes connected with the CAs.

However, if an administrative court declares the concession tender to be illegal, the CA, executed as a result of the concession tender, becomes questionable and may be invalidated only by a commercial court.

For the purposes of simplifying the dispute resolution related to concession tenders and the CAs, we suggest transferring concession tender disputes to the jurisdiction of commercial courts.

Unclear Provisions of Draft Law

On carrying out a thorough analysis of the Draft Law, we were able to identify a number of unclear provisions. We, therefore, urge the Ukrainian Parliament to comprehensively revise the Draft Law, excluding or amending the following provisions that may have unpredictable or unnecessary consequences:

— provisions of the Draft Law on the fixed payment of the concessionaire to the state or municipal company holding potential concession object on its balance sheet should definitely be amended. This needs to be done to prevent the risk of quasi-financial encumbrances of the concession object being established intentionally to decrease investor’s interest in its concession;

— there is a clear need to assess whet­her the concessionaire should be entitled to transfer a state or municipal concession object into a lease alongside inapplicabi­lity of regulation on state and municipal property lease to the concession object’s lease; and

— the Ukrainian Government does not have to establish a specific company, whose purpose is to assist a grantor, because it appears that the Draft Law has already granted the relevant functions to advisors, international financial organisations, and independent experts.

Please note that the above list of unclear provisions is not exhaustive, as only a few provisions were included in this ­example.

Conclusions

To develop an effective and transpa­rent concession instrument that will become successful in attracting foreign investment for Ukrainian infrastructure, the Ukrainian Parliament should amend the Draft Law to procure legal mechanisms, which:

— are clear and practicable;

— do not violate the rights of third ­parties;

— secure grantor’s, concessionaire’s, and creditor’s rights within a concession project; and

— leave no room for manipulations by dishonest parties.

If the Draft Law were to be amended to this extent, it would enable a realistic assessment of potential concession projects and their subsequent successful implementation, which would benefit all participants.

¹ Ukrainian Infrastructure: OPEN for Investors / Official web site of the Ministry of Infrastructure
of Ukraine // [Electronic source]. — Access mode: https://mtu.gov.ua/files/Ukraine%20infrastructure%20open%20for%20investors%20Eng.pdf

² Our analysis of legislation was conducted on 4 April 2019, when this article was submitted to the editor

³ Will the New Draft Law On Concessions Trigger a Flurry of Investment into Ukraine? M. Maksymenko, R. Khmelnytskyy / Ukrainian Law Firms 2018. A Handbook for Foreign Clients // [Electronic source]. — Access mode: http://ukrainianlawfirms.com/reviews/infrastructure/