Understanding procedures, stakeholders and milestones of Ukraine’s future recovery is essential for all parties planning to be involved in that process, including on the construction side. In this effort, the key messages currently available are as follows.
Corporate Presence in Ukraine
Foreign construction companies can carry construction activities in Ukraine by establishing one of the following structures:
- local permanent representative office (branch)
- local subsidiary (LLC)
A local subsidiary is usually in greater demand considering, in particular, the following:
(1) it is a separate legal entity with separate legal liability, albeit typically owned and run by the parent company, (2) it is faster and easier to establish, (3) it provides the possibility to obtain a local license required for carrying out construction activities, and (4) it can be sold to other persons. There are important remarks to each of these items, which should be addressed on a case-by-case basis.
Regulatory Presence in Ukraine. Licensing of construction activities
In Ukraine, construction of certain facilities (i.e., facilities with medium and significant consequences – so-called CC2 and CC3) is subject to licensing.
There is currently no procedure of recognition of foreign construction licenses.
The procedure for obtaining a construction license is rather complex and has significant gaps and uncertainties. Due to several reasons, including incomplete reform of construction regulations, licensing procedure is currently not functioning and so obtaining a license is technically not possible. In the meantime, as a temporary solution for the martial law period, the right to conduct construction activities may be obtained by business entities based on a declaration.
What does the declaration mean?
The declaration means submitting an application in electronic or in paper form through electronic service delivery portal (Diia) or one of the administrative service centers. The applicant should be entitled to start performing the declared activities upon submission of such declaration. However, it is advisable to wait for the licensing (permitting) authority (i.e., State Inspection of Architecture and Urban Planning – the “Inspection”) to process and include the submitted declaration into the respective register, which will eventually serve as a formal confirmation of the right to perform construction activities.
Such declaration procedure, essentially being a substitute for a license, is temporary. After the end of martial law, the entity must apply to the Inspection and obtain a permanent license as applicable.
For the period of martial law, the licenses and permits issued earlier are deemed automatically extended for the period of martial law plus three months from the date of its termination.
Overall, from a policy perspective, licensing remains an open issue and is pending legislative solution. It is broadly expected that this area will be further reformed after the war in Ukraine ends.
Local Clients for Recovery Projects
To understand who should be approached for potential cooperation on the future construction / recovery projects, hence are the main options in the public sector.
- The State Agency for the Restoration and Development of Infrastructure of Ukraine (the "Restoration Agency")
Restoration Agency is a body aimed to manage recovery projects previously submitted by local communities through a digital system and agreed with the government.
For this purpose, the Government of Ukraine has created a Digital Restoration Ecosystem for Accountable Management (the "DREAM") – a state digital system that will provide a single platform for all reconstruction projects in Ukraine, where local communities can create and present necessary reconstruction projects, as well as investors and counterparts will be able to track the entire reconstruction cycle, from design, public procurement, construction, reconstruction and repair to commissioning of the finished facilities. DREAM system is designed to introduce clear accountability and transparency in the reconstruction process.
- State bodies, enterprises and organizations as clients of separate projects
Large state-owned companies operating in certain infrastructure sectors, such as Ukrainian State Railways (the national railway carrier), the Ukrainian Sea Ports Agency (the authority managing Ukraine's port infrastructure), Naftogaz (the gas supply provider), Ukrenergo (electricity transmission system operator of Ukraine), Energoatom (the largest producer of electricity in Ukraine), Ukrhydroenergo (the largest hydro-generating company in Ukraine), Gas Transmission System Operator of Ukraine, local utility companies etc., may also be contractors for individual reconstruction projects in certain infrastructure areas. Typically, such projects should be organized through direct cooperation or public procurement (if applicable).
Structuring Partnership Relations in Construction Projects
Parties can structure their relationships with partners as corporate or contractual joint ventures (although the latter are subject to rather burdensome regulations in Ukraine). Subcontractor arrangements are broadly used as well.
Joint venture arrangement can also be considered for project financing purposes. However, note that Ukrainian law provides for an exhaustive list of instruments to attract funds to finance construction of the residential premises. Joint venture agreement is not included in this list and therefore can only be used for non-residential projects.
Procurement and Financing
As far as a project involves budgetary spendings, procurement laws should be applied.
Local tender procedure is applied if any payments/contracts exceed a certain value threshold (subject to certain statutory exceptions). Within the period of martial law in Ukraine, this threshold is as follows:
- for the procurement of goods and services (except for routine maintenance services) – UAH 100 thousand and more
- for maintenance services – UAH 200 thousand and more
- for works – UAH 1.5 million and more
If a project is funded by international financial institutions (such as World Bank, IBRD, EBRD etc.), such institutions keep the powers to introduce their own procurement rules and regulations. In practice, therefore, construction projects with international financing are usually carried out based on standard procurement procedures of the respective finance organization, being the most known and comfortable standard for international bidders.
If a project is funded by other external sources (i.e., charity funds, international donor’s funds, etc.), the public procurement procedures may not apply, although this should rather be assessed on a case-by-case basis.
In addition, there are certain exceptions to the above thresholds, which will not be subject to the tender process, namely in cases of procurement of goods, works and services needed to restore the facilities of the electric power, nuclear power, coal mining and oil and gas complexes during the martial law period.
By Oleg Boichuk, Partner, Olena Kasatkina, Senior Associate, Asters