Public Private Partnerships in Ukraine Some Issues for Consideration

1. Public Private Partnerships in UkraineSome Issues for ConsiderationJohn MillnsWednesday 8th December 2010

2. Public Private Partnerships in UkraineSome Issues for Consideration • A Public–Private Partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. • It involves a contract between a public-sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in that project. • Over the past two decades more than 1400 PPP deals were signed in the European Union, which represent an estimated capital value of approximately €260 billion. • The European PPP Expertise Centre (EPEC) was established to support public-sector capacity to implement PPPs and share European experience (www.eib.org/epec)

3. Public Private Partnerships in UkraineSome Issues for Consideration • Types of PPP include, Government service delivery contracts, joint project financing, transfer of assets (such as land/infrastructure), capital subsidies/grants, tax breaks, guaranteed annual revenues (fixed period) • Typically, a private-sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period • The SPV often involves a building contractor, a maintenance company and a bank lender(s). In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV • Hungary and Czech Republic are the most enthusiastic CEE countries. Other countries less so and results are variable (issues regarding spiralling costs, long term taxpayer debt burden and extent of public value for money) • Law of Ukraine N 2404 on Public Private Partnerships came into power on October 31st 2010

4. Public Private Partnerships in UkraineSome Issues for Consideration What is Public and What is Private? • Between 1922 and 1991 Ukraine as part of the Soviet Union with centralised decision making and planning. The private sector was severely constrained but in practice informal horizontal links were widespread and a massive unplanned second “informal” economy existed • Between 1991 and 1999 due to a lack of either central planning or a market economy Ukraine lost 60% of its GDP. Ukraine was slow in implementing structural reforms and continued to subsidize state-run industries and agriculture . • Soon after independence the Government formed a legal framework for privatisation but privatisation was not entirely transparent and a large number of state-owned enterprises were exempt from that process. • Bureaucracy increased and corruption significant. Today Ukraine still remains 145th in the world investment climate rankings and 179th on ease of obtaining construction permits - out of 183. Most foreign investors need local expertise/contacts to do business

5. Public Private Partnerships in UkraineSome Issues for Consideration • Crossroads between Europe, Russia and Asia. Largest country on European continent. 46 million people and middle income • Massive under-capacity in warehouses, logistics centres/hubs storage/cool houses (102nd on world logistics performance index 2010) • Significant underdeveloped infrastructure (many roads, bridges, underpasses unchanged since Soviet times). Significant pledges from Government to upgrade • One of the worlds highest rail users 40% electrified and a State monopoly • Major air, sea and land port (18 public and 7 private ports) investments (visa free increased visitors, plans for Euro 2012, WTO and ENP) • Produces nearly all types of transportation vehicles (spacecraft/launch vehicles, Antonov airplanes, KrAZ trucks etc.) • Ukraine is one of Europes largest energy consumers almost double the energy consumption of Germany (per unit of GDP) • Power sector is the 12th largest in the world in terms of installed capacity and plans to double by 2030 (primarily nuclear). Renewable energy still small

6. Public Private Partnerships in UkraineSome Issues for Consideration • Highest information technology market in Central and Eastern Europe and growing at 40% year • Active participant in scientific research (such as remote sensing, space exploration/satellites) • Best soils in Europe Ukraine could triple current agricultural production with the required investment in agri-technology, machinery (10% of use compared to Western Europe) and irrigation and into agricultural markets/processing • 7th place in the world by the number of tourists visiting in 2008 (25.4 million per year according to World Tourism Organisation rankings) • Ukrainian stock market recorded the second highest growth in the world of 130% and has market capitalization in excess of $111.8 billion and major public privatisation possibilities still exist (such as Ukrtelecom) • Government also anticipates other PPP possibilities such as heating and distribution of energy, water, public health, waste disposal, mineral exploitation and extraction, property and services management, recreation, culture and sport

7. Public Private Partnerships in UkraineWhat Needs to be Done? • Clearly expressed Political and Ministerial support to PPPs • A capacity within public authorities to plan, specify, negotiate, manage and effectively supervise PPPs • An independent judiciary and an enforceable basis in law for property rights, contract dispute, bankruptcy and settlement mechanisms • Sound investment, anti-monopolistic and conflict of interest codes in place • Consideration of a specialized legal team for PPPs and for independent regulation • A strategic planning and budgetary framework in place that ensures infrastructure choice is in line with the government’s development strategy and does not place a long term burden on taxpayers • Prioritisation and ceilings set on the total amount of future taxpayers money each Ministry or local authority is permitted to commit for PPP projects each year and within a medium term planning framework • Proper assessments made of the levels of acceptable risk and contract length (long term is higher risk and requires more due diligence, feasibility studies, partners, negotiations, transaction costs etc.)

8. Public Private Partnerships in UkraineWhat Needs to be Done? • Sufficient competition at the tender stage and a level playing field for all potential domestic and international investors to ensure value for public money • Transparency with the public and domestic and international investors to create a positive and trustful atmosphere • Ceilings set for cost changes, contract penalties, calculations of any refinancing benefits and clauses for termination, default and contingencies • Contract compliance with environmental and labour standards • Performance based state subsidies that carry a universal, or near universal, service obligation to incentivise the provider to become increasingly efficient over time • A tendering and procurement and PPP implementation process that is continuously monitored and with comparisons made and published of private sector performance data over time • Ongoing skills upgrading to improve the technical capacities of public officials for project design and assessment of different PPP scenarios • Ongoing exchanges of information and good practices at national, regional and local level