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Counsel, Head of Infrastructure, Kinstellar Kyiv
Private Sector Engagement for Modernization of its Port Infrastructure
The Government Now has a Strategy
Despite having the largest port potential in the region, with 13 state-owned sea ports located on the coasts of the Black and Azov Seas, Ukraine’s port industry struggles with various problems, including outdated and worn-out equipment, a lack of deep-water anchorages, the inadequate condition of public transport infrastructure, fragmentation of port lands and assets, lack of proper regulation for outer harbour (roadstead) construction works, high port tariffs compared to neighbouring countries, etc.
There is also an urgent need, among other things, to modernise state-owned port assets and to improve their management, both of which require significant financial investments and new approaches using the best international practices.
After years of doubts and disputes regarding the policy and strategy for the development of Ukrainian ports, the government has decided to proceed with the gradual withdrawal of the state from stevedoring activities, especially in sea ports with low cargo flow, and have opted to involve the private sector in modernisation of the country’s port infrastructure. The relevant plans are explained in the recently adopted National Transport Strategy and Sea Ports Development Strategy. Due to the lack of fiscal resources and poor management of the assets of state ports, engaging with private-sector investors with the necessary financial resources, knowledge and technologies appears to be a reasonable solution and the most viable option for the rapid modernisation of the country’s state-owned port sector.
The following private sector projects completed in the past three years and planned for implementation in the near future demonstrate the capacity and interest of both Ukrainian and foreign investors in the sector:
- Portinvest’s announced plan to invest USD 150 million to develop a grain terminal at Yuzhniy port;
- Plans announced by Berezan Port to develop an intermodal deep water port in Berezan Lime in Mykolaiv Region;
- The signing of 35-year concessions for the Olvia and Kherson sea ports in 2020;
- HHLA’s investment in the development of its Odesa Container Terminal and the recent establishment of its own intermodal company;
- The launch of the Neptune terminal by Cargill in 2019;
- Korean Posco Daewoo’s acquisition of a 75% stake in the Mykolaiv grain terminal in 2019;
- DP World’s acquisition of a 51% stake in the container terminal at Yuzhniy port in 2020.
Options for Private Sector Engagement
Ukrainian law provides the following main options for private investors to invest in state-owned port infrastructure:
- PPPs and concessions.
Although the privatization and lease of state-owned assets are rather familiar for market players in Ukraine, their effective use still requires improvement of the regulatory framework. Implementation of the “port-landlord” model in Ukraine requires, among other things, a balanced approach to resolving the land and asset fragmentation issue without violating the legal rights and interests of existing tenants.
The adoption of the new Concession Law by the Ukrainian Parliament in 2019 opened the door for the private sector to engage in modernisation of the country’s port infrastructure on a concession basis. Although the Draft Law was criticized by some experts during its development, the government—with the assistance of international advisors and including support from the IFC and EBRD—managed to adopt a progressive law that establishes a clear procurement procedure and grants guarantees and protection normally expected by investors in concession projects worldwide, which allows for the structuring and preparation of bankable concession projects.
In the last two years the regulatory framework in Ukraine relating to concessions and the protection of creditors’ rights has developed significantly. The pledge of proprietary rights under a concession agreement, the execution of direct agreements and the replacement of a concessionaire in default all became possible, which taken together establish the basis for project financing for concession projects. The successful concession of Olvia sea port to Qatari QTerminals, with a USD 120 million investment in the modernization of the port, demonstrates that the concession mechanism may be successfully used by the state to attract investments without losing state control over the relevant assets.
The benefits of concessions for the state compared to privatization and lease are obvious. The private sector also benefits from concessions, as they open doors to investment in strategic port infrastructure that is off-limits to privatization. Concessions also have a number of advantages compared to a lease, such as:
- state assistance in various forms and other obligations of the public partner to the investor;
- the possibility for the concessionaire to lease part of the assets;
- the possibility to team up with other investors in implementation of the project;
- the ability to pledge rights arising from the concession agreement to attract financing;
- broader protection of investor interests, such as stability of law guarantees, the possibility to transfer disputes to international arbitrage, etc.;
- the waiver of sovereign immunity by the grantor;
- simplified and faster acquisition of land lease rights without the need to pass through the time-consuming land allocation procedure. All land allocation formalities are resolved by the public partner prior to commencement of the concession;
- the possibility to perform design and construction works based on the land title documents of the previous balance holder;
- a simplified procedure for the write-off and demolition of assets and their reconstruction;
- the possibility to work under the permits and licences of the previous balance holder of the concession assets for six months, which allows for an earlier start to business activity, etc.
To optimize the success of port concession projects requires the government and various state-owned companies and agencies to work to improve the business environment in the country, including by:
- establishing favorable conditions and stimulating project financing in Ukraine. The availability of project financing will be a positive signal for investors and will improve the perception of the country in the eyes of the international business community;
- rehabilitating and increasing the capacity of critical port infrastructure, such as engineering and railway networks and automobile access roads, to support the stable growth of cargo to ports and the construction of new port capacities. Any expectations, requirements or plans on the part of the state to increase the capacity of concession assets may break down due to the deterioration and insufficient capacity of Ukrainian roads, railways and power grids.
Inspired by the success of the first pilot concessions, the government now plans for 10 of its 13 sea ports to be transferred under concession within the next 10 years, including Yuzhniy port, the passenger terminal at Odesa port, the ferry and railway complex as well as the container terminal in Chornomorsk, and the Mariupol, Berdyansk and Izmail sea ports.
Three smaller ports — Skadovsk, Bilhorod Dnistrovskyi and Ust-Dunaysk — have been transferred to the State Property Fund of Ukraine and are being prepared for sale (privatization). The announcement of privatization tenders for the Ust-Dunaysk and Bilhorod Dnistrovskyi sea ports are expected shortly, while the Skadovsk tender has been postponed until 2022.
The government is now actively preparing the Chornomorsk ferry and railway complex and Chornomorsk container terminal for concession. In the run-up to the concession tender, which is expected by the end of 2021, the government is focusing on restructuring the currently fragmented asset structure of the businesses, resolving issues with court disputes, and procuring the necessary feasibility studies and tender documentation.
Meanwhile, due to the lack of capacity on the public side, unsolicited proposals from investors are welcomed. Ukrainian law provides an investor that develops an unsolicited proposal with a pre-emptive right to the project under the same terms as the best bid submitted for the concession tender, as well as the right to the reimbursement of its expenses for the development of an unsolicited proposal from the successful bidder if the initiator fails to win the tender. In this way, not only can the state benefit from unsolicited proposals by reducing state expenses and expediting the preparation of port concessions — private investors may also better prepare for concessions in advance. Understanding such benefits, Asket Shipping, Georgia Invest Group and TIS recently announced plans for the development of unsolicited proposals for the concessions of Berdyansk port, Ismail port and the Odesa passenger terminal, respectively.
Our experience of successfully supporting the pilot Olvia sea port concession, together with the preparation of other concession projects, gives us confidence that concessions can be used efficiently by the public and private sectors for joint infrastructure projects in Ukraine.