During the presentation of the Ukraine Recovery Plan at the international conference in Lugano, Prime Minister Denys Shmyhal singled out the attraction of private investment through public-private partnership projects (hereinafter referred to as PPPs) with appropriate benefits for private investors among the sources for the reconstruction of the country.

A few days before the conference, the Ukrainian parliament had registered draft law No.7508, designed to improve the mechanism of public-private partnership to speed up the restoration of destroyed infrastructure. The concept of the reform was developed by the National Investment Council with the engagement of Ukrainian and foreign experts, academics, and business representatives.

The Verkhovna Rada supported the draft law in the first reading in October last year. Since then, discussions and work on its improvement before the second reading have continued. We at Transparency International Ukraine have also analyzed the text provided by the authors for corruption and other significant risks and now share our reservations and recommendations.

State of affairs with the legislation

Despite the long and confusing history of the development of national legislation in the field of PPPs, which has lasted since 1999, its formation was completed only at the end of 2019. Then the law came into force, distinguishing between the regulation of concession and other forms of PPP implementation. It also provided for:

  • application of a single procedure for initiating and deciding on the implementation of PPPs;
  • possibility of initiating a concession by a potential concessionaire;
  • engaging advisors and independent experts to develop PPP projects, additional guarantees for private partners;
  • determining the features of interaction between public and private partners in the areas of road infrastructure and natural monopolies.

However, the 2019 reform was not fully operational: only 4 new PPP agreements were concluded over the following 2 years. This was due to both a decrease in business activity because of the coronavirus pandemic and shortcomings in legal regulation, such as lengthy bureaucratic procedures because the preparation to implement projects can take from 1.5 to 2 years.

The full-scale invasion only made the situation worse. If the authorities are serious about attracting private investment on PPP terms to rebuild the destroyed infrastructure, this mechanism clearly needs to change.

What the draft law proposes

Draft law No.7508 amends more than twenty laws; in particular, it significantly updates both specialized laws—on Public-Private Partnership (hereinafter referred to as on PPP) and on Concession.

One of the main changes is to clarify the forms of public-private partnerships. The draft law excludes property management and joint venture agreements as forms of PPPs. Instead, it will be carried out based on a concession agreement or a public-private partnership agreement. Such changes will transform the specialized PPP Law from a framework to a special one, since in the future it will regulate only relations related to the preparation and implementation of PPPs as a separate form of partnership.

The scope of PPPs is also expanding due to new transport infrastructure, residential real estate, and social infrastructure. These and other projects will be able to obtain funding from new sources—from donors for grant funds.

The list of public partners has also been expanded. Business entities of the public sector of the economy, such as Ukrzaliznytsia or Ukrposhta, can be those partners. This will make it easier for them to attract private investment to develop their own infrastructure.

Another key change is the simplification and cutting of procedures to develop PPP projects. Such conditions will apply only to projects with a below-threshold value, the cost of which does not exceed EUR 5.382 mln. For them, the requirement to prepare a feasibility study of projects is canceled, and the period for adopting a decision on the implementation of public-private partnerships is halved.

In addition, introducing the European Single Procurement Document (ESPD) standard will simplify the preparation of applications for candidates and facilitate access to participation in the competition for foreign investors.

Particular attention in the draft law is paid to infrastructure and economic recovery projects. These will concern the construction/reconstruction of destroyed or damaged infrastructure as a result of military aggression against Ukraine and will be developed separately at the national and local levels. For such projects, a special procedure is provided for the preparation, selection, and conduct of a tender to determine a private partner.

Private partners and concessionaires will be selected at a tender through updated competitive procedures (open bidding, restricted bidding, competitive dialogue), which will be conducted in the electronic trading system. However, its launch, as well as that of a similar system for concessions, is expected by the end of 2025.

These are not all the changes, but some of them, in particular regarding the powers of selection commissions, qualification requirements and criteria for evaluating bids, conducting competitive procedures, and new forms of state support, will be considered further.

Risks of the draft law

While processing the text of draft law No.7508 (as of July 12, 2023), we identified the risks associated with:

–       general aspects of PPP/concession implementation;

–       holding a tender to determine a private partner/concessionaire and concluding an agreement based on its results;

–       financial and property aspects of PPP/concession implementation;

–       preparation and selection of projects for the recovery of infrastructure and the economy; construction of housing at a below-threshold value;

–       non-disclosure of information on tenders to determine a private partner/concessionaire.

Given the number of identified risks of the legislative initiative, in this analysis, we will focus on those that, in our opinion, are the most significant. More detailed information on all comments and recommendations to draft law No.7508 can be found at the link.

Inexhaustible list of qualification criteria. No ratio of the specific weight of criteria for evaluating bids.

Amendments to both specialized laws provide for the powers of the selection commission to establish one or more “other” qualification criteria other than those defined by law. It is provided that such criteria should relate to “fitness for conducting professional activities, economic, financial condition, technical and professional ability” and comply with the principles of “transparency, objectivity, and non-discrimination.”

This approach is risky because the selection commission can, at its own discretion, set any criteria for the defined categories, in particular those that can artificially narrow competition. At the same time, the provision on the compliance of the criteria with these principles seems declarative.

In addition, the nature of the categories of “other” criteria that the commission may determine (“exercise of professional activity, economic, financial condition, technical and professional ability”) effectively corresponds to the “main” criteria provided for by law. Therefore, “other criteria” are already covered by “main” ones and it is inexpedient to set them separately.

The draft law also provides for the possibility of determining the specific weight of the criteria for qualification selection and evaluation of the tender bid in the tender documentation. However, the ratio of the specific weight of the criteria in the draft law is not determined but remains at the discretion of the selection commission. In such circumstances, the selection commission may not only establish other criteria than those specified by law, but also provide for an excessive weight for such criteria, distorting the competition and the results of the evaluation of the tender bid.

TI Ukraine recommendation:

–       to remove provisions on the right of selection commissions to establish other qualification criteria, except those specified by law;

–       to determine at the level of the law the requirements for the ratio of the specific weight of the qualification criteria, technical and financial-commercial criteria for evaluating the tender bid.

Unsettled issues of limiting the maximum number of applicants and selecting the best applicants

The draft law provides for the possibility to limit the maximum number of participants in certain competitive procedures (restricted bidding, competitive dialogue) who will be invited for further submission of bids/negotiations.

The decision to limit the number of applicants in a particular competitive procedure will be made by the selection commission. It will also determine the rules for selecting the best applicants to progress to the next stage of the competition.

The risk is that the law does not actually restrict selection commissions in these powers. The draft law does not provide any grounds (conditions) for limiting the maximum number of applicants in the competitive procedure or any additional criteria for selecting the best applicants; they will also be determined by the selection commission.

With no clear requirements of the law, selection commissions can make unreasonable decisions on limiting the maximum number of applicants in the competitive procedure—both due to a lack of experience in the field and for the purpose of abuse. In both cases, this will lead to a narrowing of the competition.

Determining the criteria and rules for selecting the best applicants remain at the discretion of the commission. They should be objective and non-discriminatory, but such restrictions are formal, and the risk of providing benefits to individual applicants is real.

TI Ukraine recommendation: to define at the level of the law the principles and conditions for limiting the maximum number of applicants (for example, depending on the expected cost of the project), as well as the criteria and rules for selecting the best applicants.

Lack of an alternative way to appeal actions, decisions, or inaction of the public partner/selection commission.

Along with the practically unlimited and potentially risky powers of selection commissions, the draft law provides for the only way to resolve disputes arising in connection with the tender to determine a private partner/concessionaire—in court.

Undoubtedly, only courts should resolve disputes related to the conclusion of PPP contracts based on the results of tenders. However, the term of hearing an administrative case may reach 3 months. Thus, in case of filing a complaint regarding the decision, action, or inaction of the selection commission that took place after the evaluation of tender bids, the court may complete the consideration of the case after the winner of such a competition is determined, and a contract is concluded with them. As a result, for some disputes, which in particular relate to the tender procedure, judicial proceedings may be ineffective.

In this aspect, it is advisable to provide applicants/participants with the opportunity to appeal the actions, decisions, or inaction of the public partner or the selection commission to a specially formed appeal body (commission). Such a body could ensure prompt consideration of complaints regarding procedural disputes that will arise during the tenders, suspend the tender period while they are considered, and make decisions binding on the public partner (concessionaire)/tender commission. However, such a right of appeal will not limit the right to appeal to the court.

TI Ukraine recommendation: to provide an opportunity for applicants/participants to appeal against the actions, decisions, or inaction of the public partner/selection commission to a specially formed appeal body (commission). 

Restrictions on holding auctions

The draft law proposes to hold electronic auctions when the difference between the results of the evaluation of the highest-ranked bid of a participant and at least one of the bids of other participants is less than or equal to 10 percent. Moreover, the auction may be provided for by the commission in the tender documentation.

Such restrictions can have a negative economic effect because, in the process of bidding for an attractive investment project, the financial and commercial indicators of the bids of participants can improve in each round (especially in conditions of high competition), and the cost of the PPP/concession project can decrease. In addition, the use of electronic auctions contributes to ensuring the transparency of competitive procedures and minimizing the risks of abuse and violations in determining the most cost-effective competitive bid.

TI Ukraine recommendation: to exclude the provision for a 10% difference in bids as a condition for holding an auction. Not to provide the selection commission with additional powers to determine the conditions for conducting electronic auctions, but to determine them at the level of the law.

Restrictions on concession and PPP terms are not clearly defined

According to the draft law, the total period of implementation of a PPP/concession project may be determined, taking into account the period necessary for:

–       creating and maintaining the object to achieve the goals and objectives of the project;

–       managing (operating) the object or providing socially significant services to achieve the goals and objectives of the project;

–       effective transfer of operational risk (the risk of maintenance of the PPP/concession object during its life cycle) to the private partner;

–       reimbursement of investments made in the concession object and obtaining a defined level of profit.

But the proposed changes establish only the possibility, not the obligation, to determine the term of the concession, taking into account the established restrictions. This creates space for their selective consideration or non-consideration in determining the term of the concession.

Moreover, such restrictions make it possible to determine the term of the concession beyond the one actually required by the concessionaire to reimburse the investment.

In practice, a lengthy concession without clearly defined conditions for its application can become a mechanism for “hidden privatization” of public or municipal property. This is when the concessionaire, after reimbursement of the investment, continues to use the object free of charge without acquiring it at market value. In addition, they may be provided with state support in the form of the purchase of goods (works, services) that they produce or compensation for the difference between the minimum guaranteed and actual level of demand for such goods (works, services).

TI Ukraine recommendation: the maximum term of the PPP/concession should not exceed the term reasonably necessary for the private partner to reimburse the investment made in the PPP object and obtain a defined level of profit.

Disadvantages of some forms of support for PPPs and concessions

One of the forms of public support proposed by the draft law is to guarantee the implementation of payments in favor of a private partner (concessionaire) to compensate for the difference between the minimum guaranteed and actual level of demand for goods (works, services), the production (performance and provision) of which is expected to be ensured as a result of implementing the PPP (concession) project.

In this case, the calculation of the payment in favor of the private partner or concessionaire is carried out considering the methodology for calculating prices for goods (works, services) specified in the PPP agreement or concession agreement.

There is a risk that the methodology based on which the payment is calculated may be determined by the parties in the contract unreasonably, creating an advantage for the private partner/concessionaire.

Another form of support for the implementation of PPPs (concession) is the acquisition by a public partner (concessionaire) or a person acting on their side of a certain amount of goods (works, services) produced (performed, provided) by a private partner (concessionaire) under the PPP (concession) agreement.

Effectively, this is a case of procurement outside the procedures provided for by the Law on Public Procurement, which contradicts it since it does not provide for exceptions for such procurement. In addition, there are no safeguards in the draft law for situations where such support will be excessive and unjustified.

TI Ukraine recommendation: to unify the methodology for calculating prices (tariffs) for goods (works, services) at the level of a bylaw; to align the provisions of the draft law and the Law of Ukraine on Public Procurement in terms of procurement of goods (works, services) produced (performed, provided) by a private partner under a PPP agreement.

Disadvantages of the special procedure for the preparation of national and local recovery projects

The draft law establishes a special procedure for the preparation of recovery projects for 7 years from the date of termination or cancellation of martial law. The preparation of such projects will not require a feasibility study and effectiveness analysis of the implementation of public-private partnerships.

Such simplification of the procedure for the preparation of PPP projects, in particular concessions, for restoration can lead not only to the implementation of low-quality or economically unjustified projects, but also to the inefficient use of budget funds for their preparation for a long time, even after the end of the war.

The draft law does not provide for the compliance of PPP recovery projects with the documents developed for the restoration of regions and territories—the programs of comprehensive restoration of oblasts and territorial communities, as well as the relevant recovery and development plans. As a result, PPP recovery projects may be isolated from the real reconstruction needs of the country and its regions.

To form the Lists of recovery projects and conduct tenders to identify private partners for their implementation, the draft law provides for the creation of 4 types of commissions. However, none of them provides for the inclusion or engagement of the public. In addition, the draft law does not contain any rules on ensuring the openness and transparency of the activities of such commissions, in particular in terms of publishing their decisions. This will prevent effective public monitoring of the activities of such commissions and the procedures for selecting PPP recovery projects.

TI Ukraine recommendation: To apply the simplified procedure for the preparation of PPP projects to restore the economy and infrastructure exclusively to projects with a below-threshold value and not longer than 3 years after the abolition or termination of martial law. To align the criteria for the inclusion of PPP recovery projects with legislation. To provide in the draft law provisions on the openness and transparency of the activities of commissions and the mandatory publication of decisions adopted.

Conclusion

Public-private partnerships are one of the mechanisms that Ukraine can potentially use to overcome the consequences of the full-scale war. In the context of a budget deficit, its advantage is to reduce public spending to rebuild the destroyed infrastructure and maintain it.

The experience of previous years has demonstrated that the legislative framework in the field of PPPs needs to be improved. In addition, Ukraine, as a candidate for EU membership, should improve its regulatory framework and ensure that its legislation complies with EU law.

Draft law No.7508 contains a number of positive innovations, such as expanding the scope of PPPs, sources of their financing, simplifying and shortening the procedures for the preparation of PPP projects. However, due to a significant number of risks, the balance of interests of a public and private partner may be violated, and the draft law does not offer an effective way to protect such interests.

In addition, the project does not meet its immediate goal of accelerating the restoration of infrastructure affected by armed aggression. The inconsistency with legislation may result in the discrepancy of PPP projects with the recovery needs of the country and regions, particularly when considering the possible questionable procedure for the preparation and selection of such projects.

We have already brought our comments and proposals to the draft law to the attention of its authors, and some of them were welcomed. We also provided the results of our analysis for MPs to review, as they are direct participants in the legislative procedure, and for other stakeholders in the field of public-private partnerships.

Therefore, we expect that our recommendations will be considered and reflected in the final version of the draft law before the second reading.

This publication was prepared by Transparency International Ukraine with the financial support of Sweden and the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of Sweden and the European Union.