Transforming Kyiv’s Development through Public-Private Partnerships
The most important challenge facing Kyiv today is to change the way in which government works
DECEMBER 11, 2015
Paul R. Thomas
President of IRE Ukraine LLC
The most important challenge facing Kyiv today is to change the way in which government works. The current system operates the way it does because it benefits those who control it. One important step for going forward is for the government to adopt an inclusive model of development based on the concept of a ‘Public-Private Partnership’. The fundamental benefit of the P3 model is that it helps forge a common consensus on ‘the way forward’ out of the disparate objectives and interests of all stakeholders who are unable on their own to achieve a developmental goal.
Today, relations between the Kyiv City Government Administration, the private business sector and residents who call the city home remains mostly adversarial, characterized by lack of trust and lack of mutually beneficial cooperation. The government produces development plans in a top-down approach with a lack of transparency and excessive regulation. Residents either acquiesce to that which they cannot control, or protest with increasing intensity. Government rarely initiates inclusive communication but has been increasingly responsive to initiatives brought to it through an activist bottom-up approach. The private business sector, whether large or small mostly sees engagement with government more often as a risk or a cost than a potential benefit. As a result, much of the government’s developmental efforts have been underachieving, unsustainable or damaging.
The most important challenge facing Kyiv today is to change the way in which government works. The current system operates the way it does because it benefits those who control it. We must find a way to transform the existing governmental system and its developmental model into something new that benefits all stakeholders: government, business and society.
A Way Forward
One important step for going forward is for the government to adopt an inclusive model of development based on the concept of a ‘Public-Private Partnership’. A public-private partnership (hereafter “P3”) is a legal, financial and operational model of development whereby the governmental sector, the private business sector and the ‘third sector’ (NGO’s, community groups and residents) combine their skills and capacities to finance, implement and operate projects to ensure that they are economically and socially viable, and thereby sustainable, over the long term. The fundamental benefit of the P3 model is that it helps forge a common consensus on ‘the way forward’ out of the disparate objectives and interests of all stakeholders who are unable on their own to achieve a developmental goal. A P3 is a symbiotic entity where the totality exceeds the sum of its parts.
P3 projects vary widely around the world: from building and operating new parking garages, to power generation, to the redevelopment of abandoned military or industrial sites for new residential and commercial use, to historic preservation of specific buildings and sites.
The P3 approach originated and has been most successfully applied in developed countries with abundant financial resources, a high level of government skills and capacity, and a large and active third sector. The scale of P3 projects is often huge – in the range of hundreds of millions of dollars and with time frames measured in years or decades, for example the redevelopment of the Brooklyn Navy Yard in New York City to multipurpose use.
A Strategic Demonstration Project for Proving the P3 Approach: The Kyiv Velodrome
To prove the viability of the P3 approach to development requires that we start with a strategically chosen pilot project. The project must be small scale yet highly visible. It must be a project with clear value for the community in which it is located so that third sector involvement is maximized. It must be a project that does not exceed the current financial, technical and operational capacities of potential stakeholders. And it must be legally feasible to implement. I believe Kyiv’s historic Velodrome represents the best strategic choice.
Legal and Economic Issues: In 2010, the Verkhovna Rada passed a ‘Law on Government Private Partnership’ that was amended in 2015. This law is not in any way similar to legal structures governing Public Private Partnerships in Western countries. The current law does not envision the creation of not-for-profit legal entities to govern projects (government would control everything); it places all financial technical and operational risk on the private sector entities involved; and does not envision any role for third sector involvement. The current law has proven to be ineffective in stimulating the ‘partnership’ in development that it was supposed to facilitate. However, there is no serious provision in the current law that would prohibit the Kyiv city government from creating the type of P3 structure that I am advocating.
The economic principle that defines the P3 legal structure and operational approach that I am advocating is ‘stakeholder incentive’. The idea is that the more an entity is ‘vested’ in a project the more incentive it has to make it as profitable as possible. Profitability in the P3 approach is enhanced by (1) vesting a much larger group of stakeholder skills and capacities into the project, which would not be available to a government-owned or privately-owned company; and (2) since the P3 legal entity is ‘not-for-profit’ (which a private legal entity would not be) its profitability is enhanced through tax savings. The Velodrome most likely is not sustainable as a government owned or privately owned company, but most likely is sustainable as a not-for-profit company operating under a P3 legal structure.
Currently the Velodrome (land and structures) is on the balance sheet of a Kyiv city government company. Under its current legal structure, the Velodrome is controlled by government as a bureaucratic object rather than managed entrepreneurially as a community asset by a diverse group of community stakeholders.
I propose creating a new a new not-for-profit company that would lease the entire Velodrome complex from its current owner (the City Government) according to use rights set out in the lease agreement. A Board of Directors, in addition to representatives of government, would include the private small businesses operating and investing in the Velodrome (e.g. bicycle sale and rental, training, education and other activities involved with cycling) as well as certain NGO’s and representatives of local community groups. Crucially, a P3 approach for the Velodrome will attract strong support from competitive racing groups with international contacts and expertise in cycling and racing that government lacks. The NGO “New Kyiv Velodrome” is already actively involved with the Velodrome and is an obvious entity for more formalized participation.
Stakeholders Agreement would stipulate all rights and responsibilities of each stakeholder to ensure good governance and adherence to all applicable laws and regulations. The benefits of the P3 model for the Velodrome would be enhanced transparency, increased profitability and improved sustainability through third sector support. Transparency and community support would help shield the Velodrome from the type of negative behavior that plagues so many government agencies and companies. Ultimately, experience with the P3 model at the Velodrome would build governmental skills and capacity to allow it to scale-up to the larger projects that the City so desperately needs.
Why Scale Matters?
Successful implementation of large scale P3 projects is much more difficult in countries, such as Ukraine, with corrupt legal systems and governmental institutions lacking sufficient skills, capacities and financial resources. We must recognize that at this time ‘scale matters’ and if the Kyiv government wants to eventually implement large scale P3 projects, it must first develop the required skills, capacities and experience on a small scale where the probability of success is much greater. We can examine some of these challenges in detail.
Financial and Operational Issues: The Kyiv city government is not capable of raising large investment funds for large-scale P3 projects. In the case of the Velodrome, initial investment for renovation is small; indeed, City Administrator Klitschko has personally provided some funding for reconstruction of the Velodrome and although his largesse is admirable it does not represent a sustainable financial structure; who, for example, will provide for the cost of repairs, maintenance and capital investment long term? To depend on city budget support or personal largesse is not a viable long term financial strategy.
Societal Issues: Lack of transparency and corruption are endemic in government and government-owned companies, and particularly in large scale projects, but can be mitigated effectively in a small scale and highly visible project like the Velodrome. Most importantly, a successful Velodrome P3 project will increase people’s trust in government by demonstrating that the government can operate transparently, honestly and competently, particularly in partnership with private business and the third sector.
The sociological principle that justifies the P3 model approach I am advocating is the recognition that urban environments need to enhance the ‘quality of life’ of city residents through the provision of ‘public assets’ such as cultural, sports (e.g. Velodrome), entertainment and other types of community facilities that cannot be provided by a private sector company alone (due to insufficient profitability) or by government alone (due to insufficient funds).
Sustainability: Ensuring long term sustainability of a large scale P3 project would be extremely difficult for the Kyiv city government today given the financial, technical and operational complexity associated with large scale projects. Whereas third sector involvement in large scale P3 projects may not be needed for various reasons or is opposed by government and business, the Velodrome requires third sector involvement to be sustainable. NGO’s and community groups involved with cycling activities will generate revenue for the Velodrome through utilizing it for racing, training and related events under their expert management, particularly if vested as a stakeholder in its future; they in turn benefit by raising their national and international profiles thereby enhancing their own fundraising capabilities. The Velodrome has great potential to improve the local economy and the quality of community life by providing a public space that belongs to the community. Economic and social benefits include new small businesses, employment and community services. Community access for a variety of activities, particularly for children or retirees, could be provided free of charge and this would serve to integrate the Velodrome deep into the fabric of the local community thereby generating widespread resident support.
Next Steps: This short article is not intended to be a complete legal, financial and operational design for exactly how the P3 model could be applied to the Velodrome; this will take a great deal of thought and work by all stakeholders working together. Next steps should include (1) convening of various public forums to explain the benefits of the P3 developmental approach to government, business and the third sector; (2) development of a practical and detailed plan by potential stakeholders to transform the Velodrome to a community asset based on an integrated P3 approach; and (3) wide and transparent dissemination of information concerning the Velodrome’s experience as a demonstration project to guide further transformation of Kyiv’s developmental efforts.
I stand ready to participate in any effort to bring the P3 developmental model to Kyiv and apply it to the historic and strategic Velodrome and I encourage all those who desire real and practical reform to advocate for such an approach. Based on my 20 years of business experience in Ukraine, I do not see any obvious reasons why we cannot apply the P3 approach to Kyiv’s historic Velodrome today and to larger projects in future. The only constraint is the desire of all involved (particularly the Kyiv City Government) to make it happen – where there’s a will to do something, there is always a way.