Ukraine’s transport and infrastructure system plays a key role in the country’s economy, particularly with its role in export and trade in the agricultural, industrial, and other sectors. Ukraine is conveniently located on different transport routes. However, it does not fully capitalize on its geographical benefits and does not fulfill its potential as a transit country, as it is not yet well-integrated in international transport networks, lacks modern infrastructure, and has limited market opportunities in certain segments (for example, railway services).
Under the EU-Ukraine Association Agreement, Ukraine has to liberalize the market and increase competition, improve the quality of transport services, implement European technical rules and standards, and develop multimodal, TEN-T-connected networks. The Government approved the National Transport Strategy and subsector-specific strategies and programs. However, implementation is not uniform and needs to speed up to meet the applicable timelines. Progress with the sector reforms so far is largely due to IFIs such as the IFC, the GIF, the World Bank, and EBRD, which have provided technical and financial support, including the creation of the new concession framework and the launch of PPP projects.
High on the List of Priorities
Attraction of private investment is among state priorities. Transport and infrastructure projects account for 40% of some 100 priority investment projects shortlisted by the Government for 2021-2023. An unprecedented “Big Construction” program was launched to modernize the country’s infrastructure. Recently, the “On the State Support of Investment Projects with Significant Investments in Ukraine” Law was adopted, providing for state support to projects which have a total investment value of over EUR 20 million. State support can take different forms, including tax exemption, creation of the supporting infrastructure by the state, facilitation of access to the grid, and granting of preemptive rights to use or own land. The total amount of state support cannot exceed 30% of the investment volume.
Pilot Concession Projects Catalyzed by the New Concession Framework
In 2019, the new, long-awaited “On Concessions” law was adopted, facilitating the launch of pilot concession projects. The law streamlined tender procedures and improved the balance of responsibilities and increased protections for investors, including the right to select the foreign governing law and to enter into direct agreements. The outlook for bankability of PPP projects has hence been improved. Based on the new framework, the property of state stevedoring enterprises in the ports of Kherson and Olvia was granted as a concession. At an estimated USD 120 million, the Olvia project, implemented by QTerminals, a Qatari company, in the Mykolayiv region, represents one of the largest foreign direct private investments in Ukraine’s history.
OPRC to Improve the Outlook for the Road Sector
In November 2020, the first Road PPP Program was announced, involving long-term (20+ years) output and performance-based road contracts with availability payments to be made from the State Road Fund. Notably, the investors will not have to undertake the traffic risk. Several pilot projects have been shortlisted, with the first tenders expected in autumn 2021.
What is Next for the Industry?
Despite the progress, much work still lies ahead. In the near term, budget laws have to be changed to provide long-term budget commitments for PPP projects and to prioritize the availability payments. With the State Road Fund as an example, other sector-specific funds – including airports and inland waterways, among other things – have to be introduced. The landlord port model has to be implemented to enable port authorities to consolidate and grant land and other property within seaports to investors. A new law on railway transport is required to demonopolize the rail market and enable rail carriers, whatever their ownership structures, to provide services and obtain nondiscriminatory access to the rail infrastructure. An independent transport regulator has to be introduced, and systemic capacity-building efforts are needed to improve performance of the public sector.
The regulatory reforms will greatly influence the launch and success of investment projects. Following the pilot concessions, more such projects across different sectors are likely, including concessions for the railway and ferry complex and freight terminals in the Chornomorsk seaport; concession for the passenger terminal in the Odessa seaport; concessions for berths in the Berdiansk seaport; and concessions for railway stations in Kyiv, Kharkiv, Dnipro, and Mykolayiv, among other cities. Certain facilities, including those of several regional grid operators and stevedoring companies, are waiting to be offered for privatization. However, the primary focus and expectation remains on PPP projects as the main instrument of private investment in the sector.
By Svitlana Teush, Partner, Redcliffe Partners