April 23, 2023 - Ukraine

Recovery Of Ukraine: How Public-Private Partnership Works According To The Rules Of State Aid
  by Olena Gadomska

The rules of state aid work for the implementation of public-private partnership projects and require the state, as a partner, to comply with the conditions of the transfer of budgetary resources to private partners, in order to avoid a ban on the conclusion of state contracts due to the incompatibility of state aid with economic competition.

The Ministry of Economy proposed a plan  to restore Ukraine  with a price tag of $750 billion of budget funds. The implementation of the plan began with the signing of a memorandum of understanding with the International Finance Corporation (IFC), which will help Ukraine rebuild its transport, logistics, urban, social and energy infrastructure. One of the rather optimistic sections of this memorandum is the involvement of private investors in the reconstruction of Ukraine's infrastructure within the framework of public-private partnerships and concessions.

In simplified terms, a public-private partnership (PPP) is when the state and business become "friends" for the sake of a joint project, for example, the construction of roads, ports,  airports  , or the management of such projects. In theory, both sides should get satisfaction from the cooperation - for the business, profit, and for the state - a passable road, comfortable and safe school buildings, airports filled with people, ships rushing through ports, etc.

As part of the plan, somewhere at the start, a selection of PPP projects took place, among which:

In a parallel world, the Antimonopoly Committee is working on its homework from  the European Union  to build a monitoring and control system of state aid in Ukraine as required by the Association Agreement between the EU and the recently opened arms of the European Community for the future membership of our country in the EU.

In simplified language, the control of state aid is a procedure for evaluating projects, budget support schemes of individual companies or activities through the prism of "good/bad for economic competition and "possible/impossible". It has been operating since 2017, regulated by the Association Agreement, the law on state aid to business entities.

Resources coming from the European Union (such as the Structural Funds), the European Investment Bank and the European Investment Fund or any international financial institutions such as the  International Monetary Fund  or  the European Bank for Reconstruction and Development are considered public resources if national authorities authorities have the right to use these resources (in particular, the choice of beneficiaries).

A beacon for the application of legislation on state aid is the involvement of budget funds, guarantees, property or other forms of support at the expense of the state, including those received from the International Finance Corporation (IFC), in PPP projects.

The state aid rules work in the case of PPP projects and require the state, as a partner, to comply with the terms of the transfer of budgetary resources to private partners in order to avoid a ban on concluding state contracts due to the incompatibility of state aid with economic competition.

A soothing pill for the Antimonopoly Committee when evaluating PPP projects will be the fact proven by the state partner that the  private investor  did not receive economic benefits (advantages) on the way to the state contract, and therefore the absence of state aid in PPP projects.

European law and case law in state aid and the Antimonopoly Committee presume that such an advantage is excluded if a private investor receives a public contract after a competitive selection in the procurement procedure.

However, European practice proves that the fact of carrying out a public procurement procedure in itself does not exclude the application of state aid rules, as it requires verification and assessment by the European Commission of the conditions for conducting such procurements.

The Antimonopoly Committee, focusing on European legislation and judicial practice, explained what it means by "competitive procedure", which can exclude the presence of state aid

The competitive procedure must simultaneously be:

In the decisions  of the European Commission  on state aid, there is a detailed assessment of each principle and conclusions "observed/not observed".

Therefore, the proven fact of the absence of at least one of the above-mentioned signs of a competitive procedure may indicate that a private investor has received an economic benefit (advantage), and therefore - state aid, which is unavailable to other companies and requires a committee assessment on the subject of "good/bad" for economic competition.

The current  Association Agreement  and obligations on the implementation of European state aid rules inspires the Antimonopoly Committee to adopt the experience of European colleagues in the field of state aid in order to skillfully cope with the post-war reconstruction of Ukraine with the involvement of state resources.

European experts of the technical support project of the Antimonopoly Committee in the field of state aid at one of the webinars on the application of state aid rules  told where and how to look during the evaluation of PPP projects in order to exclude the provision of state aid.

Experts recommend the Antimonopoly Committee, state and private partners when evaluating PPP projects to make sure, in particular, that the tender selection procedure was carried out in accordance with the criteria of non-discrimination, transparency and openness, the proposed price of the project or the sale of land is market, an independent expert assessment of the value of the land was carried out, the criteria for granting a concession and budgetary guarantees have been met.

How PPP works on the example of subway modernization in London

The experts demonstrated how the rules of state aid and PPP work on the example of the case of modernization  of the London  subway with the participation of the state and private partners in the case 264/2002 London Underground public private partnership.

The public partner in the person of the operator "London Underground" and private investors divided the rights, responsibilities, risks - private investors had to cope with the modernization of the infrastructure of the London underground for 30 years - to update the rolling stock, tracks, signals, stations and escalators. At the same time, the metro kept the management of stations, trains, passenger services, ticketing systems and promised to pay private investors for the services/works stipulated in the contracts.

Private partners were selected based on the results of the negotiation procedure, where the tender offers did not contain a detailed description of the works/services/supplies, the terms of the contracts were detailed and changed over time. Such a negotiation procedure, subsequent contract changes and the statement of the interested party about the presence of state aid forced the European Commission to assess the presence/absence of economic benefits (advantages) for private  investors in order to find out whether state aid was received in the PPP.

At the end of the assessment, the European Commission decided that  "the process undertaken by London Underground for this PPP was open, transparent and non-discriminatory...that the arrangements reflect the market price and therefore the PPP agreements do not constitute State aid".

The expediency and efficiency of spending budgetary resources is ensured by competitive procedures, the principles of which are under the protection of the Antimonopoly Committee as a public procurement appeals body and a body that monitors state aid. In the power of the decision-making committee, according to which the transfer of state resources can be recognized as inadmissible state aid, and the received by companies within the framework of the PPP can be returned to the budgets.

Therefore, the worlds of PPP and state aid should unite for the optimal legal and effective use of budget resources for the reconstruction of Ukraine after the war.