EBRD and IFC: First of all, the authorities have to decide whether they are going down the PPP or concession route
Exclusive interview of the regional manager of the International Finance Corporation (IFC) on Public-Private Partnerships (PPP) in Europe Mehita Fanny Sylla and deputy head of the European Bank for Reconstruction and Development (EBRD) in Ukraine Mark Magaletsky to Interfax-Ukraine
– Ukraine has relatively good legislation on PPP, but as a result of improved legislation we have only two concession agreements. What is holding this process off?
Mehita Fanny Sylla: IFC welcomes the Ukraine government’s significant efforts and progress in developing the public-private partnership (PPP) framework, including the amended Law on Concession, the PPP Law, and the creation of a PPP Agency.
However, it takes time to prepare a PPP project, and preparing a pipeline of viable PPP projects is even more time-consuming. While the first step involves deciding on the sectors and projects to be developed, the next step requires testing the waters before deploying a large program of PPP. The recently completed concessions of Kherson and Olvia seaports were successful pilot PPPs and demonstrated the government’s commitment to increasing the private sector participation in the development of infrastructure. That was a good opportunity for the Ukraine government to test the legal framework and eventually think about relevant adjustment for future PPPs.
The high interest of international investors at the tender stage was a strong and positive signal. All these developments provide opportunities for international investors interested in investing in Ukraine.
PPP projects are long term engagements and require a rigorous preparation from the initial idea until completion. It is a good thing that the government approaches this in a gradual and systematic manner.
Mark Magaletsky: Legislation is an important part of the process. Implementation, of course, is something else. First of all, the authorities have to decide whether they are going down the PPP/concession route. The Ministry of Infrastructure, for instance, needs to decide whether a certain port should go to concession. Or a city municipality has to decide on parking concessions. Once the decision has been taken, the preparations start. It's a very time-consuming process. It cannot be done in a month. Sometimes, it takes a few years. The preparations for the Olvia and Kherson concessions started in 2015 and the tender only closed last year. The transition will be completed this year. Sure, the first projects are always more difficult than those that follow. It’s not set in stone, but it can take 5-7 years. And it’s complicated enough. This project, Chornomorsk, will be done much more efficiently and far more quickly, as the model is already in place. Generally, though, it takes time.
– How long? What do you predict for Chornomorsk concession?
Mark Magaletsky: We believe, all going well, that it can be done in 1-2 years.
– You are deepening cooperation with Ukraine in order to prepare for the Chornomorsk sea port concession. What benefits will it provide for Ukraine?
Mehita Fanny Sylla: It's important and beneficial for the country because the concession of the Chornomorsk container terminal will be prepared and implemented in alignment with best international practices. This will help bring in private investments and expertise—as well as innovative management solutions—with the aim to ensure sustainability of Ukraine’s port infrastructure.
Engaging private sector players can ease the pressure on the public budget and help operate and administrate the port through best technologies and offer a competitive logistic platform and value chain for imports and exports. Properly structured PPPs can provide the country with modernized and well-maintained infrastructure assets which remain in public ownership, sparing more public money to meet other essential needs. The upgraded port will help increase transportation of containerized goods.
Mark Magaletsky: The port industry is very competitive. There is strong competition between terminals and ports ‒ even between countries ‒ in the same area on the Black Sea. The share of private operators is already high. Eighty per cent of the cargo transshipped through Ukrainian ports is by private operators, up from zero per cent 25 years ago, in a demonstration of private-sector efficiency. The state, however, still has significant port assets that are not being managed as well as they could be. Chornomorsk, especially the container terminal, is a good example. Fifteen years ago, it was a star of the Black Sea, home (temporarily) to half a million containers; last year, it was zero. The only way for the country’s stevedoring operators to survive, basically, is to find a way to attract private companies and capital, to give them a second chance at life. Otherwise, state-managed terminals will decline and, eventually, vanish. Private business is simply more efficient.
– What other similar projects, in your opinion, could get the interest of investors in terms of PPP?
Mehita Fanny Sylla: The successful implementation of Ukraine’s first port concessions can help the country set a precedent for PPP projects in other sectors. In this context, the government is thinking about new sectors that can benefit from the PPP model. There are already some ideas. IFC, in partnership with the Global Infrastructure Facility and the World Bank are exploring with the government potential PPPs in the road, railway, health care and irrigation sectors. Like Mark said, it’s an opportunity for the government to upgrade the country’s own assets. Some assets can be used more efficiently and generate more revenue for the country if properly modernized. We are still analyzing the feasibility of some projects. We will keep engaging with the government until we reach an agreement that suggests the best sustainable and bankable solutions to address the challenges of the sectors mentioned earlier.
Mark Magaletsky: Eventually the government and the authorities will have to decide to go for it. We can hold discussions with them and help them prepare, but until a decision has been taken, we cannot proceed. Roads, railway stations, airports, irrigation infrastructure and healthcare are all being discussed. Some river infrastructure might have concession potential, too. But it is the government's decision, not ours.
– But conversation about highways, airports, roads and railway stations takes place for a long time. And we didn't go further than that discussion.
Mark Magaletsky: This is what I mean. The decision has to be taken.
Mehita Fanny Sylla: Some sectors are more challenging than others—for example, in many countries reforming the railways sector takes time, as governments need to address many complex issues at the institutional level before bringing in the private sector. Exploring options about bringing in the private sector is already a good step with the aim to improve the railways traffic.
– Is the concession period for "Olvia" and "Kherson" optimal? Should it be longer?
Mehita Fanny Sylla: The technical conditions for concessions always depend on the project risks and the country’s macroeconomics. For Olvia and Kherson ports, the concession period is 35 and 30 years, respectively. It depended on a lot of parameters, which were factored in during the due diligence and the financial analysis of the project. These parameters further defined the optimal period for both projects. By “optimal period” I mean the period that is sufficient for the private operator to cover its investment obligations and have the necessary return on investment. IFC would never support a transaction if it doesn't make sense for both the private operator and the government. The partnership should be based on a balanced risks allocation between the parties involved.
Mark Magaletsky: These are the main factors. One worth highlighting, perhaps, is the useful life of the asset. In the case of concessions, this is so the investor can see their investment being recouped in a reasonable timeframe. For port assets, a period of 30 years is normal. But, again, it depends on the project.
– And what about the duration of the possible projects in other sectors?
Mehita Fanny Sylla: It varies, depending on the sector and level of investment. For example, in the health care sector, the concession period could be shorter. If we take a hospital or diagnostic center project, it can be completed within 15-20 years. PPPs in certain sectors such as ports, roads, and railways tend to take longer—from 20 to 35 years. However, 40-year long projects are rare.
– Could you tell about the plans of your institutions in other sectors on PPP in Ukraine?
Mehita Fanny Sylla: Amid the challenges posed by the global pandemic, IFC continues to focus on catalyzing private sector participation in Ukraine across sectors. However, it depends on what the government wants to do and the strategies that are in place. We follow their plans. We need to understand their needs. Given IFC's longstanding experience in PPP transaction advisory, we are well-positioned to serve as an effective bridge between public sector and reputable private sector investors and operators. Additionally, we bring in extensive knowledge and global expertise. We can help scan the sector holistically and analyze PPP opportunities, enabling the government to make informed decisions. To sum up, I would say Ukraine is a big priority for IFC. We look forward to helping the government engage more private sector and attract more timely investments across multiple sectors.
Mark Magaletsky: From our side, Ukraine is one of the key economies in which we invest. In terms of specific plans, well, for now, we have signed this agreement with the Ministry of Infrastructure and the Ukrainian Sea Ports Authority to prepare a public-private partnership for Chornomorsk seaport. We have discussed other ideas and are exploring them. When the authorities will take decisions on them, however, we cannot say. That is the thing with PPPs and concessions. In general, though, we are working in different sectors through various financial instruments, not just PPP.
We hope our total financing for Ukraine this and next year will be around €1 billion, spread over private businesses and state companies, municipalities and, hopefully, new concessions.
– How is the PPP going on the regional level? As far as I know, Lviv is the leader here.
Mehita Fanny Sylla: As in many other countries, Ukraine has made substantial progress in decentralization. The city of Lviv is one of IFC’s strategic partners across sectors, including municipal infrastructure. We are engaged in discussions about improving healthcare infrastructure (hospitals or diagnostic centers). At IFC, we believe that well-structured PPPs can help the country create a robust health care system, which is essential for resilient growth in the post-COVID era.
– How long will it take?
Mehita Fanny Sylla: I am not sure, because we first need to finalize the pre-feasibility study. Even if a municipality is interested in the PPP model, we need to make sure that it is best suited for that particular project and is aligned with municipal health care reform and related investment strategy.
Mark Magaletsky: For municipal infrastructure, the main difficulties, obstacles and risks are actually socio-political. Most municipal utilities in Ukraine, such as water or district heating companies, are owned and regulated by municipalities. Every year, Ukraine holds discussions on tariffs. At the moment, the talks are on district heating and gas prices. Unfortunately, Ukraine does not have a robust, predictable system of regulation. Tariff setting is highly politicised. Private investors cannot be expected to take risks and provide money, then get bogged down in discussions with different political factions, central government and the city council. For city utilities managed by municipalities, it’s fairly straightforward: the utility may decide there are reasons to increase tariffs, but politics prevent it from doing so, so the city ends up subsidising its own utility. That’s just moving money from one pocket to another. With private investors, that approach will not work. Private investors need a certain amount of stability and predictability and robust regulation. Many municipal utilities around the world ‒ water companies, heating companies and so on ‒are concessions. But for that to happen, you need high-quality regulation and minimal political interference ‒ something that is not the case in Ukraine.
You also mentioned Lviv, which is a true leader in attracting international financing, thanks to its municipal guarantees. Lviv is a key client for us. We have eight projects with it in different sectors, from electric transport (trolley buses) to roads and district heating, for instance. But all are under municipal guarantee.
– What is the role of the international financial organizations in PPP? Could they be one of the parties or could it provide financing to an investor?
Mehita Fanny Sylla: IFC can be a strategic adviser. This means that we can help the government structure and tender a PPP, including preparing a comprehensive contractual framework, defining bidding criteria and tender rules, and liaising with potential investors until commercial closing of the transaction.
If IFC is asked to offer financing to the selected bidder, we make sure the advisory team and the investment team do not interact within the same project. IFC has rigid policies in setting boundaries and preventing potential conflict of interest situations.
Mark Magaletsky: It is the same for us: two different roles that are totally independent of each other. The advisory role is to help the government prepare the tender. When we have a bidder, that job is done. The winner of the tender may decide ‒ or not ‒ to approach the IFC or the EBRD, or both. We consider this a separate assignment.