Public-private partnership to mobilize $1 billion for Ukraine

According to World Bank data, Ukraine needs $524 billion for recovery. However, after three years of full-scale war, the state lacks sufficient resources for that. The state budget is allocated to defense, while donors cover the deficit. At the same time, some projects must be implemented here and now.

Public-private partnership (PPP) mechanism enables action now. The draft law No. 7508 on PPP adopted in its entirety by Parliament opens up opportunities for Ukraine to implement projects in partnership with businesses and donors. Although the PPP concept has long existed in Ukraine, it can be fully put to use now. 

We expect that its implementation can enable Ukraine to raise up to $1 billion for specific projects in the transport, energy, healthcare, and municipal infrastructure sectors. 

Before 2022, any major infrastructural project relied on the state budget. For example, if there were plans to build a hospital, funds were allocated, a tender was held, then the hospital was built and the construction paid for. However, under such an approach, the state was faced with typical issues: delays, excessive spending, and lack of performance guarantees. 

A concession, as a different model, where businesses build facilities and earn on the final consumer (e.g. in the case of a port or a toll road) was far from suitable for all objects. Hospitals, schools, water supply systems, or housing cannot be built without government or donor support. A mechanism of long-term budgetary obligation was not in place, which blocked the opportunity to pay the investor upon construction. 

Because of that, the basic global model was not operative in Ukraine up to now. Under that model, a private partner builds infrastructure at their own expense, and the state gradually returns the investment, paying from the time of operational readiness rather than for the construction as such. This results in a kind of deferred payment. 

Such a model has been successfully operative in the United Kingdom since the 1990s. Over the past 30 years, more than 1,200 such projects have been implemented in the UK for over £70 billion. Now, we are creating the conditions for Ukraine to do the same, but faster. 

Draft law No. 7508 enables launching a hybrid PPP model: a combination of private and donor financing (grants by international partners). 

The financial capabilities of the state budget are extremely limited: almost all the resources are covered by guarantees of debt obligations. The need for infrastructure investments is growing daily. The projects cannot wait. However, their price is often too high for one budget or for one investor. 

The combination of donor and private financing will:

• mitigate risks for businesses, 
• reduce the cost of the project for the state,
• and avoid excessive pressure on the budget. 

And most importantly, it will provide an opportunity to start building essential infrastructure already now. If France or Switzerland are ready to provide a grant for a part of a hospital, and businesses finance the rest, it will be ready in two years, not in a decade.  

Simplified procedures are now applied for small projects (up to €5.5 million). Because a fully-fledged feasibility study was needed even for the smallest projects before, major costs and the involvement of consultants were required. From now on, a concept note is sufficient. This significantly helps accelerate the preparation, reduce costs and make quick decisions on implementation. This mostly concerns small projects in communities, such as rehabilitation centers, kindergartens or affordable housing. 

For example, title to land can be immediately granted for the construction of small residential complexes for people who lost their homes. Such solutions can be especially useful for small cities and villages, and especially for high-impact initiatives. 

Extension of the public partners’ circle in a PPP is yet another change. From now on, not only central government authorities or local self-government bodies, but also state-owned companies like Ukrzaliznytsia or Naftogaz can partner up with private businesses. Earlier, partnerships could not be implemented based on these companies’ assets due to the absence of proper legislative framework.

Thanks to this change, infrastructure recovery projects can be implemented, such as reconstruction of railway stations or construction of logistics hubs. Ukrzaliznytsia can pay for such projects itself, thereby helping avoid extra pressure on the state budget. 

Apart from that, the Cabinet of Ministers is now authorized to introduce a simplified procedure for economy or infrastructure recovery projects, in particular in such areas as healthcare, energy, transport, and social services.

The procedure will be in effect during the martial law and for seven years after its cancellation. It will be applicable to the projects designated at the state or community level. As the next step, the government must develop clear rules for the implementation of this mechanism. 

The law also provides new guarantees for investors, in particular regarding legislative stability, the terms of changes in the value of an agreement or its early termination. 

Thirty sectoral laws were updated at the same time in order to lift the barriers for launching PPPs in the areas of, among others, housing, transportation, medicine, education, cultural heritage, or electronic communications. 

This brought the sectoral legislation into alignment with PPP and will enable launching projects without legal limitations, which earlier restricted the development of partnerships. 

The draft law No. 7508 opens new opportunities for the mobilization of private capital in infrastructure projects, particularly in the sectors of transportation, energy, healthcare, and social facilities. Until now, only two large concession projects exist in Ukraine, namely involving the Olvia and Kherson ports, and they were started before the full-scale invasion. However, the new law has the potential to improve this number.

Currently, concession projects are being prepared in Chornomorsk, as well as the PPP projects in healthcare in Zhytomyr, Vinnytsia and Lviv. The draft law enables attracting donor financing for implementation of such projects. 

It is expected that $1 billion will be mobilized for specific projects in the coming years, thanks to the new legislation. However, the potential is much higher. For instance, in the post-war period airports may become the key objects of PPPs. These are classical concession models with profit-making business logic. 

Success will not only depend on the legislation, but also on donor financing, the security situation and the level of investor trust. However, a new legal framework is being established, which will enable launching projects as soon as such an opportunity arises. 

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