Investing in the Ukraine

Investing in the Ukraine

There have been two main trends in Ukraine's port sector in recent years. The first centres on reconstruction, re-equipping and deepening of existing berths to enable them to cater for bigger ships. The second is to create new and modern terminals.

The government understands the need to reorganise the transport industry, but there have been insufficient legal means for facilitating large-scale privatisation.

There are three main traditional cargo flow directions to consider - Black Sea/Mediterranean Sea, Danube and Dnepr. Four major international transport corridors cross the Ukraine and transit cargo accounts for 40 per cent of port throughput. In fact, the Black Sea area has resumed its historical r?le as a crossroads between Europe and Asia. There are 19 sea ports, - three in the Dan-ube basin, 12 on the Black Sea and four in the Sea of Azov.

Together they provide 223 berths with an overall length of 38 kms. Total port capacity today is estimated to be around about 130 mta. Odessa, Ilyichevsk, Yuzhny and Mariupol provide about 70 per cent of Ukraine's sea port cargo operations.

It is recognised that existing port capacity could be increased if facilities were used more effi-ciently and/or if there were investment in new equipment. Allowing for these improvements, it is thought that there is a capacity reserve of about 30 per cent.

Joint ventures

Given all the circumstances, the best means of strengthening the ports could be through business alliances with successful private companies. Current legislation prohibits privatisation of existing ports (although from time to time changes in the law are proposed).

However, the law does not prevent private investors from creating new private ports or terminals and a few projects have been mooted. Existing private terminals include, for example, the Illychevsk fuel terminal, Avlita in Sevastopol and Nibulon and Nika-terra in Nikolaev.

Unfortunately, the investment capabilities of most national and foreign companies working in the country are far from sufficient for modern port construction and operation. Therefore, as a simple matter of fact, the major Ukrainian ports are state-owned.

Which way forward

Global experience indicates that there are several avenues for private capital to participate in the port industry, such as leasing, BOT arrangements, joint ventures, purchase of shares in the stock market, public tender, etc. However, Ukraine has not yet decided which path to follow.

All commercial (ie non-military) seaports - including sea fishery ports - are regulated by the Merchant Shipping Code (MSC) and are are classed as public transport enterprises. Private enter-prises may carry on economic activity in them but the ports themselves must carry out regulatory and control functions on behalf of the state. MSC is subject to revision by executive order (EO). For example, last April, EO 312 transferred responsibility for pilot services and vessel traffic control from the harbour master in each port to a state enterprise, Delta-pilot.

Right to exist

A sea port authority has no right to throw obstacles in the way of other enterprises and organisations which operate on its territory and it may not meddle in them. However, as private moorings are under the administrative control of the public port, their owners may experience problems.

Vessels using the port's water area are subject to the jurisdiction of the port authorities and, as many relationships are governed by custom and tradition, in practice the private firm has to obtain the port's approval to start handling operations in any case.

It is advisable to obtain approvals by way of a contract which fixes covenant provisions. For instance, part of the harbour dues and fees for services to vessels charged by the port can be received by the private terminal operator.

State port control inspection regimes are regulated by the Ministry of Transport in the commercial seaports and by the Ministry of Fisheries in the case of the fishing ports. But where the water areas of ports overlap, overall responsibility is with the harbour master of the commercial seaport.

The situation is more complicated in cases where there are no adjoining water areas between public and private ports. Every private enterprise which wants to have the legal status of seaport must provide its own, fully-functioning harbour master's office, which comes under the aegis of a third organisation, the Merchant Marine Inspection of Ukraine.

There are precedents for private terminals obtaining the legal status of a sea port, on the basis of moorings which do not belong to a public commercial seaport, for example the moorings of a shipyard. Depending on geographical location, the character of the private seaport and its area of water, the harbour master's position is different again, but legal solutions are available and have been used successfully more than once.

Admittance procedures for cargo and other property entering the country can be carried out in the frontier post in the nearest sea port. It is also possible, and more expedient, to open a frontier post or checkpoint in the private port itself.

A new law was recently drafted which makes a clear distinction between the economic or entrepreneurial activity of the seaports and "particularised services" such as maritime safety or security and which are based on international agreements to which the Ukraine is a party. Such services may be rendered only by state-owned companies authorised by the appropriate ministry.

Concession law

The law on concessions cancelled the concept of state port monopoly and established that ports can appear as a result of private enterprise initiative. This law determines that a concession is the grant of the right to create and/or manage the object of the concession within the framework of the public interest. The right is conveyed by an authorised executive body or local organisation on the basis of a concession agreement for payment.

The concessionaire receives the right to create the object of concession or to improve it substantially. Concession agreements are for no less than 10 years and for no more than 50 years. The law also established a number of other conditions for concession agreements to be valid and there exists a "model" concession agreement which has been ratified by the Cabinet of Ministers.

In the 1990s, cooperation agreements, in accordance with which an investor usually contributed by providing modern equipment and funds, were very popular in Ukrainian ports. The ports provided the infrastructure and the private investor set up and tooled a stevedoring company with the object of attracting cargoes to the port. The profits were divided in proportion to the investment of the participants. Agreements of this type are still effective in some Ukrainian ports, such as Ilyichevsk.

Lease options

An alternative approach is to lease port property and other assets including equipment in whole ("integral property complex") or in part. At least two attempts to lease the integral property complex of commercial ports have been made - in Mariupol in 2002 and Ilyichevsk in 2003). However, in spite of the straightforward statutory provisions contained in the Law on Leasing of State and Municipal Property, the attempts failed because of certain political disagreements.

It should be noted that the water area of a port cannot be leased in any circumstances as it is always classed as national property. The water area is inextricably bound up with safety of navigation which is under state control. Terminals can use the water area, however, through servitudes or other mechanisms.

Core elements

Broadly defined, the infrastructure and other assets of a port or terminal may include approach channels, moorings of all categories, navigation systems, highways and access roads, rail lines, handling facilities, protective port buildings, storage facilities, other buildings and so on.

Creation of a port or terminal is possible only if the land and water areas are available. This is obvious in itself but needs to be seen in a juridical context as well, whereby areas can be made available.

Some variations are possible as, for example, in the case of Sevastopol commercial port, where the mechanism for selecting the water area was determined by the Cabinet of Ministers of Ukraine. Today, in relation to other ports, the question is only about opening the water area to calls by foreign non-military vessels. The Land and Water Codes also contain norms regarding special purpose use of water assets.

The Law on Prices and Price Formation recognises both freely-negotiated prices and tariffs and state regulated and administered prices (Article 6). Negotiated prices and tariffs can be applied on all types of products, goods and services, except those which are controlled by the government. In summary, we can say that the legal, social and commercial bases for a privately-owned and operated seaport or terminal exist and the business climate is favourable towards such investments.

Post-election outlook

It will take some time before the political and economic stability of the country can be assessed by potential outside investors and the new President should make his policies clear. However, we do not believe that the change in government will have much influence on the good prospects for inward investment in the ports. They need foreign investment and there is no alternative.

Contrary to expectations, Ukraine's economy performed even better during the elections than in the pre-election months. Impressive macroeconomic performance last year - real GDP grew by 12.4 per cent (year on year) - encouraged inflows of FDI although cumulative FDI stock remained at a relatively low level of US bill (US per capita).

In spite of the political uncertainties related to the presidential elections of 2004, economic performance is sending positive signals to the international investment community. But further improvement of the investment climate is needed to ensure that growth is sustained.

According to latest figures from the Ukrainian Ministry of Transport and Communications, cargo volumes handled by private enterprises in 2004 came to 20.354 mt (+41 per cent), with imports up 17.8 per cent to 4.51 mt and exports up by 40 per cent to 7.75 mt, while (Russian) transit flows were down by almost 53 per cent to 7.38 mt.

The trend towards private investments is continuing. Last month, Kiev-based Oil Transport Institute started construction of a private oil handling complex near Yuzhny. It is planned to build a reversible oil terminal able to handle 1.5 mta of oil annually, with a berth able to accommodate 100,000 dwt tankers.

*Editor's note:

This article is based on a paper sent to WorldCargo News by Arthur Nitsevych, attorney-at-law, and Vyacheslav Lebedev, consultant, International Law Offices (Odessa Ilyichevsk and Kiev), specialising in business and maritime law, foreign investment and tax planning.

Most of the text was written last November but was held back from publication because of the tense situation which arose during the presidential elections. The last part was written in late January, after the mandate of the new president had been confirmed.

However, the picture is still not clear. The south of the country, where the seaports are located, predominantly supported the "pro-Russian" candidate, along with the industrial east. This may not in itself affect the climate for "western" investors, but the new president is risking a wider rift with Moscow by seeking NATO membership for his country.

The fall in Russian transit cargoes during 2004 was nothing to do with the elections (which took place at the end of the year in any case). The shift of Russian cargoes to Russian ports was, indeed, more a function of a surge in Ukraine's own exports (eg of coal) absorbing national port capacity than of Russian rail tariff policy. But things can change.

In any event, Nitsevych and Lebedev seem confident that the prospects for foreign investments in the ports industry remain good.