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Archive 2001

  • 24.12.2001

    Is Ukraine prepared to implement highway concessions?

    (Code:Q12)

    Concessions are a widespread form of private capital attraction, which is still to be introduced in Ukraine. Experience of transport infrastructure concessions in Ukraine, including roads, is very limited. For now there is only one concession project in the roads sector – the Krakovets-Lviv road. Currently six additional highway concessions are prepared. Two projects - the Kyiv-Vinnytsia road and the Russian border to Kyiv- Kharkiv-Dovzhansky road - have being opened for bids since the end of 2000. However, until now they did not succeed. This result indicates that private capital will be much more difficult to attract than it was expected. Forecasted low willingness to pay for roads by Ukrainians and, therefore, low profitability of the projects will require a more significant involvement of the state than it was initially planned.

    The paper describes the general principles of designing road concessions and then analyses the concrete institutional framework for road concessions in Ukraine. In order to identify the current problems with road concessions in Ukraine and to develop concrete recommendations for improving the situation in part IV of the paper the case of the Kyiv-Vinnytsia Road is analysed precisely by simulating different scenarios (models of estimating financial viability).

    The basic scenario is based on the government’s estimations of the costs of construction, the cost of financing (a 17% bank credit rate) and a growth rate of vehicles flow of 10%. In addition, the following assumptions are made: a duration of the concession of 30 years, a 1 % depreciation of the Ukrainian currency each year and 80% of the profit to be directed for repayment of debt to the creditor (20 % is of profit is directed to the operator1 until the whole debt is repaid).

    The main goal of using the instrument of a private road concession is to attract additional financing from private sources and to spend less budget money on road construction. In order to attract private money the concession has to be economically viable. The basic scenario made clear that under the condition that the government’s share of equity financing would be 20% and the operator’s share of equity financing would be 30% the concession would be viable only at a growth rate of vehicle flow of 10%, which seems to be very unrealistic. In order to make viability forecasts for more realistic assumptions two other scenarios were carried out.

    Research spheres:  Real sector
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