Productive beginning of 2022 regarding the systematization and harmonization of Ukrainian PPP legislation

Published on: 04.02.2022
Category: PPP News

On the 2nd of February 2022, the amendments to the Resolution of the Cabinet of Ministers of Ukraine № 950 dated 09 October 2020 were approved. The amendments clarify the mechanism of involving advisors via tender to provide services of concession project preparation, the criteria of selecting such advisors, described in the Procedure for involving advisors in the preparation of concession projects, approved by the Resolution of the Cabinet of Ministers of Ukraine № 950 dated 09 October 2020.

For the most part, the amendments supplement and specify the provisions of the Procedure of evaluating tender bids of participants in terms of assessing the quality of provided services, namely the presence and appropriate level of professional and technical qualifications of a participant’s employees.

In particular, these changes apply to:

🔹 the evaluation coefficient of each employee,

🔹 sub-criteria for assessing the experience of a particular employee and/or their subcontractors/co-contractors that have a separate qualification,

🔹 formulas for the value of the total assessment of the experience of an employee with a particular qualification, who is expected to be involved in the fulfilment of the contract for the provision of advisory services, according to the proposal of the bidder, in line with all sub-criteria specified by the recipient of the tender documentation,

🔹 formulas of the value of the tender offer of a participant, which are assessed by the criterion of the quality of service, namely the presents and an appropriate level of professional and technical qualifications of a participant’s employees;

🔹 formulas for evaluating the criterion of the quality of provided service and formulas for evaluating tender proposals of participants according to all criteria of the quality of provided service;

🔹 formulas for evaluating the present value of the proposal taking into account the coefficients of service quality criteria impact.

On the 31st of January, 2022, the order of the Ministry of Economy of Ukraine № 1067 dated December 14, 2021 “On approval of the Method Procedure for analysing the efficiency of public-private partnerships” was registered.

This Method procedure determines the general principles for analysing the efficiency of public-private partnerships (according to Part 3 of Article 11 of the Law of Ukraine “On Public-Private Partnerships” and paragraph 12 of the Procedure for the effectiveness of public-private partnerships).

The new Method procedure details the conceptual and categorical apparatus in the field of public-private partnership and contains

✔️ comprehensive recommendations on the content of the PPP concept note and the research required to ensure the high quality of its preparation, as well as recommendations regarding the analysis of the concept note and whether the decision to prepare the feasibility study for the implementation of the PPP is justified.

In general, the concept note analysis and the position of the Ministry of Economy, the Ministry of Finance and the central body of executive power, which in accordance with the law manages the relevant objects of state property (if such a body is not the initiator of the proposal) should be based on the analysis and conclusions of
whether the project corresponds to strategic directions of development
       - the problems to be solved or the needs to be met as a result of the project implementation are clearly formulated and understood;
       - the objectives of the project are consistent with the objectives and priorities of the state, sectoral or local programs as well as the Sustainable Development Goals of Ukraine, taking into account the UNECE People-first Public-Private Partnerships Evaluation Methodology for the Sustainable Development Goals;
whether the project is economically feasible and can be implemented under the PPP model
       - the proposed technical solutions and performance indicators are appropriate given the problems that exist;
       - the benefits of the project for society are higher than the economic costs of its implementation (whether the ENPV and EIRR indicators calculated according to the results of the Cost-Benefit Analysis demonstrate economic feasibility);
       - the estimated costs of the project are acceptable and reasonable compared to similar projects implemented in Ukraine or other countries;
       - existing and projected demand for goods (work, services) to be provided if the project is implemented is justified (preliminary);
       - potential risks of the project implementation and measures to minimize/mitigate them are identified, including approximate stages of their fulfilment;
whether the project is potentially commercially feasible if implemented as a PPP
       - the potential private partner may be interested in the project implementation, which is confirmed by the results of financial analysis and preliminary risk assessment;
       - the project demonstrates the capacity to generate the expected profit by a potential private partner, taking into account the average return on investment in the industry;
whether the project demonstrates budget feasibility and affordability
       - the project is acceptable in terms of budgetary constraints for public authorities (local governments) if its implementation requires state support, and
       - goods (work, services) that will be produced (performed, provided) as a part of the project are affordable to users (consumers), taking into account their willingness to pay (in the case of concessions);
whether the proposed mechanism of project implementation ensures the most efficient use of funds
       - the level of efficiency of funds usage if the project is implemented under the PPP model allows to justify the higher costs of project preparation compared to alternative options for project implementation;
       - the project can attract potential private partners, ensuring the demand and a higher level of competition during the tender;
       - performance indicators for the project are defined as well as their values to be achieved during its implementation;
       - expected project revenue is based on the forecast for the demand for goods (work, services) that will be provided during the project implementation (taking into account the effective demand evaluation and its price elasticity assessment) and/or performance indicators;
       - sufficient justifications are provided to support the potential suitability of the PPP mechanism for project implementation and to suggest a PPP (concession) option as the best alternative;
       - the proposed form of PPP implementation is acceptable and realistic;
       - project implementation risks are identified, pre-assessed and allocated through effective risk minimization plans.

✔️ comprehensive recommendations on the content of the PPP feasibility study as well as research, evaluations, financial modelling, which are necessary to ensure the high quality of its preparation. Also, the general principles of the PPP effectiveness analysis are determined.

The analysis of efficiency is carried out on the basis of the offer by:
detailed substantiation of socio-economic and environmental consequences of PPP implementation based on the results of the analysis:
    ⚬ economic and financial indicators of the financial model of PPP implementation, taking into account:
       - economic impact/consequences of the project implementation (the project must have a positive impact on the society as a whole (the benefits of the project implementation for the society must exceed its costs). This must be confirmed by the economic net present value (ENPV), benefit-cost ratio (BCR) and an economic internal rate of return (EIRR), identified in the cost-benefit analysis, methodological recommendations for which are given in Annex 4 of the method procedure, and sensitivity analysis when testing different assumptions about the project implementation, taking into account their possible consequences);
       - financial aspects (the project must be financially viable, meaning commercially viable from the standpoint of credit institutions and potential private partners (details on market sounding and consultations with potential investors are in Annex 7 of the method procedure), which must be demonstrated by financial indicators (debt-service coverage ratio) (DSCR), the financial net present value of the project (FNPV) and the net present value of the equity of a potential private partner, financial internal rate of return (FIRR) and internal rate of return on equity of a potential private partner). And/or if a project is not financially self-sufficient (a project that cannot be financially implemented solely on the basis of user payments or requires increased commercial attractiveness, like the provision of state support), various types of state support should be considered, including availability payments. The amount of state support must be determined taking into account the recommended amount of such support according to the methodological recommendations given in Annex 5 of the method procedure and the proven budget feasibility of the project);
    ⚬ social consequences of PPP implementation, including improved quality of services and increase in the capacity to meet existing demand for goods (work, services);
    ⚬ environmental consequences of a PPP project in question, taking into account the possible negative impact on the environment (the project must show a positive social and environmental impact on society and/or in case of projected negative impact, measures must be undertaken to eliminate it);
proof of higher efficiency of the project with the involvement of a private partner compared to the implementation of the project without such involvement.
       - the results of the efficiency assessment should demonstrate higher efficiency of the project implementation with the involvement of a private partner (higher net present value (NPV) and/or higher non-financial benefits of the project compared to other alternatives, including the option of project implementation through public procurement (without the participation of a private partner)) taking into account the comparative analysis of project efficiency with the involvement of a private partner and without such involvement, which must be conducted according to the guidelines in Annex 6 of the method procedure;
identification of the types of risks of PPP implementation, their assessment and determination of the form of risk management. All risks must be identified and the sensitivity of a project to significant risks must be analysed. In addition, the strategy to mitigate the identified risks and a risk management plan that can reduce the likelihood of their occurrence and/or minimize the consequences of their occurrence to a level acceptable for project implementation must be presented;
determining the form of PPP
       - based on the results of the analysis of alternative solutions to the issues in question and on the basis of the justification of higher project efficiency if implemented under the PPP model, compared to alternatives, the choice is made in favour of the PPP form, according to the Law of Ukraine “On Public-Private Partnerships”;
determining socio-economic and environmental prospects after the expiration of the PPP agreement.
       - the extent of the socio-economic and environmental impact of the project after the expiration of the PPP agreement must be estimated, including the results of such impact on the beneficiaries. The results of such a project must be sustainable and recommendations for minimizing the possible negative socio-economic and environmental impact of the project after the expiration of the PPP agreement must be given.

✔️ methodical recommendations for the implementation of individual studies and assessments necessary to ensure the high quality of PPP implementation proposal preparation, taking into account best practices and tools, including

  - the execution of the Cost-Benefit Analysis which allows assessing the cost-benefit ratio during the PPP project implementation, considering that the benefits for society should be higher than the costs (losses, negative consequences; Annex 4 of the Method procedure);

  - determining the structure of payments in PPP agreements, reasons for state support, including availability payments and availability payment amount assessment (Appendix 5 of the Method procedure);

  - executing comparative project implementation efficiency analysis with the private partner engagement or without it (via public procurement, procurement, attracting credit financing under state guarantees, etc.) by quantitative indicators (Value-for-Money (VfM) – additional value from the project implementation on the terms of public-private partnership) and qualitative where it is impossible to define quantitative indicators (Annex 6 of Method procedure)

  - conducting market sounding, consultations with potential investors at different stages of the PPP project life cycle and interacting with lenders (commercial banks, international financial organizations, multilateral development banks, etc.) that can offer financing for the project. Such consultations are intended to test the viability of the project from a private-sector standpoint, meaning that it will attract potential bidders and help to achieve satisfactory tender results. Market sounding also helps to inform the private sector about the status and gist of the project, which allows interested potential investors to start preparing for the upcoming tender (thus increasing the level of competition) (Annex 7 of the Method procedure).

On the 26th of January, 2022, the Budget Committee of the Verkhovna Rada of Ukraine at its meeting (record № 114) considered preparing for the second reading of the bill № 5090 “On making amendments to the Budget Code of Ukraine on the settlement of budgetary relations during the implementation of agreements that regulate public-private partnership, including concession agreements”. Following the consideration of this issue, a decision was made: to recommend to the Verkhovna Rada of Ukraine to adopt the draft Law of Ukraine № 5090 in the second reading as the final version of the law set out by the Budget Committee, taking into account any necessary technical, legal and editorial amendments which the adoption of this bill will require.

It should be noted that the purpose of the bill is to commence the full functioning of the PPP (concession) mechanism by ensuring the practical application of the Laws of Ukraine “On Public-Private Partnership” and “On Concession” and providing private partners (concessionaires) with guarantees that the state will fulfil its long-term obligations in the PPP field, including the provision of state support for the implementation of PPPs.