Lately, one of the key messages of the government to the public, and especially the investors, has been that Ukraine should be the next manufacturing and logistics hub. However, this idea is always followed by another recurrent note — Ukrainian infrastructure is in bad shape and desperately needs renovation.
While promoting large-scale development projects like Big Construction, Ukraine has also improved its legislative basis for large investments in infrastructure development. In this article, we delve into specifics of four legal frameworks the investors wish they knew before investing in the development of Ukrainian infrastructure.
One of the most promoted frameworks for foreign investors is concession. The new law adopted in 2019 overhauled the public-private partnership legislation in Ukraine and:
1. made it compliant with the best EU industry standards;
2. introduced a transparent and competitive concessionaire selection system; and
3. provided investors and lenders with new guarantees (e.g., direct agreements with step-in rights, free choice of applicable law and dispute resolution mechanism).
An investor may get the concession going by submitting a proposal with a feasibility study to the respective authority. In addition to the time needed to prepare the feasibility study, the concession tender takes nearly 1.7 years under the law (from the decision on concession feasibility until the signing of concession agreement).
The State has extensive plans for concessions. The upcoming projects are expected to be the concessions of a railway-ferry complex in Chornomorsk and six pilot segments of highways with a total length of 1,500 kilometers with availability payments reward.
Privatization of state and municipal property
Ukraine has over 3,000 state-owned enterprises. Unfortunately, their economic potential, which stems from their assets, is undermined by poor management. To solve this issue, the privatization framework was reworked aiming to attract new investors by electronic auctions and transparent procedure.
Despite the coronavirus crisis, in 2020 privatization was successful with more than 1,900 objects auctioned for a total value of approx. $110 million. The landmark privatization project was the sale of the “Dnipro” hotel in the downtown of Kyiv, whose starting price increased tenfold – up to $40 million.
On 30 March the Parliament adopted a bill unblocking “large privatization” – the sale of assets whose value is equal to or exceeds $9 million. Plans for 2021 are grand – the State Property Fund of Ukraine (SPFU) expects to sell JSC United Mining and Chemical Company (one of the world’s largest titanium ore producers), JSC First Kyiv Machine-building Plant, and JSC President Hotel among many other state assets.
And to top it off, the SPFU has prepared a bill introducing various amendments to privatization laws, including application of English law to the sale and purchase agreements of large privatization objects.
‘Investment nannies’ law
It has been over a year since President Zelensky announced the “investment nanny” program at the World Economic Forum in Davos. Finally, the Law “On State Assistance to Investment Projects with Significant Investments in Ukraine” was adopted and now we can see how “investment nannies” may tip the scales in favor of investing in Ukraine.
First, to be eligible for the state support program, the investor must meet the following criteria:
1. total investment exceeds 20 million euros;
2. term of investment is less than 5 years;
3. the investment will create more than 80 new jobs with above-average salaries; and
4. the investment is carried out through a Ukrainian SPV.
Secondly, the investor should enter into an agreement with the Government which determines the investor’s commitments and the form and scope of the state support. The state support is capped at 30% of the investment value and may take the form of:
1. tax (VAT, CIT, land tax) and customs duties exemptions;
2. preemptive land lease rights;
3. construction of infrastructure at the state’s/municipal’s expense; and
4. assignment of the “nanny” – a state authority to facilitate the investment project implementation.
However, the “investment nanny” does not apply to the investments made under public-private partnership framework, PSAs or privatization procedures.
The “investment nanny” law still requires several bylaws to be adopted by the Government by August 2021. In any case, we will see this program in action not earlier than 2022.
The industrial parks are in a strange spot right now. There are 47 registered industrial parks, while only 8 of them have actual members. It is not surprising that the Government took a strong grip on the improvement of the industrial parks’ regulations.
There are 5 bills registered in the Parliament that aim to simplify the creation of industrial parks, introduce additional incentives, and foresee mechanisms for tax and customs duties exemptions.
As of now, the benefits that the industrial park may provide to the investor are:
1. co-financing of investment projects;
2. interest-free loans;
3. no import duties on equipment; and
4. reduction in local tax rates (land, real estate).
In its current wording, the industrial park regulation does not contain a clear mechanism of how such benefits are provided. This should change as soon as the aforementioned bills are adopted and enter into force.
Wrapping it up
Implementation of large-scale infrastructure projects is one of the key priorities of the Government for the upcoming years. The prospects of the infrastructure development look promising, and the sheer number of investment opportunities Ukraine can offer rises steadily.
The improvement of legislation is the key to having more success stories of large investments in Ukrainian infrastructure. We have already seen the success of concession and privatization frameworks, and now we can expect great results from the “investment nannies” program and industrial parks rework.
Posted on April 18, 2021