The typically long payback period and perceived political
risks in Ukraine have long led private investors involved in a
public private partnership (the PPP) and their bankers to seek
reliable statutory and contractual guarantees to protect
investments and ensure performance by state partners.
To respond to this concern, the Ukrainian parliament has
adopted the Law of Ukraine On Public-Private Partnership No.
2404-VI, (the PPP law), which takes effect on October 31 2010.
The PPP law introduces new rules to encourage private
investment in the development of the public sector. Though many
of its provisions require further implementing legislation or
regulations, it establishes a general legislative basis to
protect the private partners' interests.
PPP is defined by the PPP law as cooperation based on an
agreement under the PPP law between privately owned legal
entities and/or individual entrepreneurs on the private side,
and the State of Ukraine, the Autonomous Republic of the Crimea
(Crimea) and/or communities represented by state and local
self-government authorities on the state side.
According to the PPP law, PPP in Ukraine is possible under a
range of types of agreements, including those for a concession,
joint venture and production sharing, and for a variety of
sectors, including mineral exploration, heat and electricity
generation, transportation, distribution of natural gas,
construction and maintenance of highways, roads, railways,
The PPP law provides for possible state support of PPP
projects from state guarantees and guarantees using Crimea and
local governments, as well as financings supported by the state
and local treasuries. It generally prohibits state and local
authorities from interfering with the activity of private
partners connected with PPP, except as may be expressly
permitted by law. Private partners are entitled to the full
reimbursement of damages caused by state and local authorities
violating their rights.
Interestingly, if the prices for the services provided
during the implementation of PPP projects are established at a
level which is lower than the amount of the economically
justified expenses for their provision, a private partner under
the PPP law is entitled to the reimbursement of its losses at
the state's expense, a virtual guarantee against the risk of
Should the prices for the services of a private partner be
subject to state regulation, such prices are required to take
into account the funds necessary to compensate for the
investments made by the private partner, unless otherwise
provided by the relevant PPP agreement.
The rights and obligations of the parties to a PPP agreement
must be governed by Ukrainian law, as valid on the date of the
PPP agreement's conclusion. The guarantee against changes in
law only applies to changes in civil and commercial laws
regulating property rights and the obligations of the parties
and will not apply to changes in legislation regulating
defence, national security, public order, environmental
protection, quality standards for goods and services, tax,
currency and customs legislation, licensing and other
relationships for which the principles of the equality of
private and public partners do not apply.
In practice, the effectiveness of the above-mentioned
investment protections ultimately depends on the authority of
state and local treasuries to dispose of funds for such
purposes, as permitted by applicable statutes, as well as on
It also depends on the application of Ukrainian law, as the
governing law of the PPP agreement, which ordinarily would be
established as applied by Ukrainian courts or by arbitral
tribunals whose decision must ultimately be enforced in
Ukrainian courts against Ukrainian state parties. Consequently,
some PPP investors may presently take limited comfort from the
assurances of the PPP law.
However, in combination with some of the foreign-based
political risk insurance that is presently available, these PPP
law guarantees, cited above, can be extremely effective as a
basis for a project. For example, under the political risk
insurance provided by the US Overseas Private Investment
Corporation (OPIC) that is available for suitable projects, the
full performance by the Ukrainian state and the other state
parties under a PPP agreement (that should include a provision
on the state parties' required performance of their obligation
in accordance with the PPP law) can be effectively backed by
the full faith and credit of the US government.
Such so-called political risk insurance by OPIC is not
limited to expropriation it may cover the full
performance by the state parties. If the Ukrainian state side
fails to perform its obligations under a PPP agreement in any
respect, and the private side obtains an arbitral award or
other suitable judgment as permitted under the relevant PPP or
other agreement, then OPIC pays the private side and takes
responsibility for subsequently recovering from the Ukrainian
state the amount paid under the OPIC insurance.
Typically, such insurance is for a 20-year period and claims
can be repeatedly made. OPIC also has approximately $1 billion
in loan funding currently available for Ukrainian projects.
Similar insurance and funding is available from international
financial institutions, like the EBRD, and other national
export insurance and funding agencies.
Coupled with such foreign political risk insurance and
funding, the new PPP law provides very effective protection for
major infrastructure and other PPP projects in Ukraine,
providing Ukrainian law protection against risk that can then
be effectively transformed into protection backed by the US or
other foreign entities providing project risk insurance.
Bate Toms and Svitlana Petrenko