This content is from: Local Insights

Changes to investment protection in Ukraine

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, among others.

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 losses.

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 funding availability.

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

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