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Protecting state property in joint activities - but missing the bigger picture? - International Law Office

International Law Office

Projects & Procurement - Ukraine

Protecting state property in joint activities - but missing the bigger picture?

August 09 2011


On May 12 2011 Parliament passed the Law on Amendments to Certain Acts on Joint Activities (formerly Draft Law 5328) on economic collaborations between public and private entities. The law aims to protect public property and sets out terms of use that seek to ensure maximum benefit for the state.

In particular, the law clarifies that property belonging to state-owned facilities which are not subject to privatisation cannot be regarded as a contribution to joint activity. If such property is nonetheless contributed in this context, this does not terminate the state's right of ownership therein and such contribution does not give the participants joint ownership of the property. However, a party may contribute the right to use such property.

Another significant aspect of the new law is its establishment of mandatory independent assessments of property that is to be contributed to joint activity. The law establishes that the public share in a joint activity must exceed 50% of the participants' joint property. In establishing this principle, the legislature probably intended to ensure a minimum level of profitability for a public company's participation in joint activities. However, the establishment of a strict limit may have the opposite effect. Many projects in which the state could take a share of less than 50% may not be realised at all, as many private companies are more likely to abandon the idea of a joint project than agree to partner with the government on terms which guarantee that the state owns most of the joint business.

As a result, the state may miss out on revenue in circumstances where it is ultimately unimportant whether it receives more or less than 50% of the joint income. Significantly, Draft Law 8721 contains a regulation suspending the 50% clause and Instruction 703/2008 of the Cabinet of Ministers provides that a joint activity contract must be concluded by a public company pursuant to an appropriate decision of the Cabinet of Ministers.

The government is pursuing its policy of a clear, codified framework for public-private collaboration in order to prevent the uneconomic use of state property and ensure maximum public benefit, with workable legal structures for public procurement, public-private partnerships and concessions. However, as the 50% provision shows, heavy-handed or misjudged regulation can defeat its own economic purpose.

For further information on this topic please contact Timur Bondaryev at Arzinger by telephone (+380 44 390 5533), fax (+380 44 390 5540) or email (timur.bondaryev@arzinger.ua).


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