On 31 January 2009, the new Law of Ukraine "On Concessions for the Construction and Operation of Highways" came into force. The new law introduces some changes that will be welcomed by potential concessionaires and their funders, but also introduces some less positive changes and some ambiguous and uncertain provisions.

Many hundreds of kilometres of the Ukrainian road network need to be constructed or upgraded before the summer of 2012 in order to meet acceptable standards in time for the European Football Championships that Ukraine is co-hosting with Poland. It remains to be seen whether this law creates a sufficiently certain and favourable framework to attract the required foreign investment.

The key changes are:

Land and permits

The new law stipulates that the concession agreement granting the concessionaire the right to construct a highway shall be conditional on the concessionaire receiving the rights of use to the necessary land. The new law does not require the authority granting the concession (the "concession granter") to assist in obtaining these rights. However, the concession granter is now obliged to:

  • ensure that the designated use of such land is not changed during the term of the concession and that there are no limitations on using the land in accordance with the terms of the concession agreement; and
  • assist the concessionaire in obtaining all necessary permits and licences.

Financing and revenue streams

The new law allows the concession granter to partly finance the construction of the road from a special fund of the state budget designated for the development and maintenance of public highways.

One of the more significant and positive changes is the introduction of availability payments. The new law states that the concessionaire may receive revenue from (a) tolls paid by users, (b) availability payments from the concession granter for the concessionaire making the road available for use, (c) payments for the use of service areas, (d) subsidies and/or compensation from the concession granter, and/or (e) any other source specified in the tender documents and the concession agreement. This is good news for potential concessionaires as, under the old law, the concessionaire could only receive revenues from tolls.

On the down-side, the new law specifies that maximum and minimum tolls and the procedure for calculating the other payments mentioned above should be determined by the Cabinet of Ministers. It is not clear whether the Cabinet of Ministers will be able to amend the tolls and other payments during the term of a concession. If this is possible it would introduce a high, and possibly unacceptable, level of uncertainty to the revenue stream of concessionaires.

Assignment of the concession

The new law introduces a key amendment to the general concession law which permits concession agreements to be assigned and requires that the procedure and conditions for an assignment must be specified in the concession agreement. This will be particularly welcomed by banks intending to fund concessionaires who may want the right to step into the shoes of the concessionaire in the event of a financial default.

Tenders

The old provisions relating to tenders for road concessions have been removed and instead the law provides that the tender procedure will be established by the Cabinet of Ministers in due course. The specific terms for each tender will be set by Ukravtodor, the state road authority.

Tax Exemptions Removed

Under the old law a concessionaire was exempt from national and local taxes and duties during the period of construction of the road. These exemptions have been removed.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 03/02/2009.