Despite having the largest port potential in the region, with 13 state-owned seaports located on the coasts of the Black and Azov Seas, Ukraine's port industry struggles with various problems, including outdated and worn-out equipment, a lack of deep-water anchorages, the inadequate condition of public transport infrastructure, fragmentation of port lands and assets,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.
Among other things, there is an urgent need 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.
- Portinvest's announced plan to invest USD 150 million to develop a grain terminal at Yuzhny port;
- Plans to develop an intermodal deep water port in Berezan Lime in the Nikolayev region announced by “Berezan Port”;
- The signing of 35-year concessions for the Olvia and Kherson seaports in 2020;
- HHLA's investment into the development of its Odessa 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 Nikolayev grain terminal in 2019;
- DP World's acquisition of a 51% stake in the container terminal at Yuzhny 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 privatisation 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, among others, requires a balanced approach to resolving land and asset fragmentation issues without violating the legal rights and interests of existing tenants.
The adoption of the new Concession Law by Ukraine's parliament in 2019 opened the door for the private sector to engage in the modernisation of the country's port infrastructure on a concession basis. Although the draft law was criticised 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.
During the past two years the regulatory framework in Ukraine relating to concessions and the protection of creditor's 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 became possible, which taken together establish the basis for project financing for concession projects. The successful concession of the Olvia seaport to Qatari QTerminals, with a USD 120 million investment in the modernisation 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 privatisation and lease are obvious. The private sector also benefits from concessions, as they open doors to investments into strategic port infrastructure that is off-limits to privatisation. 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 toward the investor;
- the possibility to lease part of the assets by the concessionaire;
- the possibility to team up with other investors in the implementation of the project;
- the ability to pledge rights arising from the concession agreement to attract financing;
- broader protection of investor interests, such as the 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 of business activity, etc.
To optimise 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 favourable 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 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 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 seaports to be transferred under concession within the next 10 years, including Yuzhny port, the passenger terminal at Odessa port, the ferry and railway complex as well as the container terminal in Chernomorsk, and the Mariupol, Berdyansk and Izmail seaports.
Three smaller ports—Skadovsk, Belgorod-Dnestrovsk and Ust-Dunaysk—have been transferred to the State Property Fund of Ukraine and are being prepared for sale (privatisation). The announcement of the privatisation tenders for the Ust-Dunaysk and Belgorod-Dnestrovsk seaports are expected shortly, while the Skadovsk tender has been postponed until 2022.
The government is now actively preparing the Chernomorsk ferry and railway complex and Chernomorsk container terminal for concession. In the run-up to the concession tender, which is expected by end-2021, the government is focusing on re-structuring the current 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 may 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 the Berdyansk port, Ismail port and Odessa passenger terminal, respectively.
Our experience successfully supporting the pilot Olvia seaport concession, together with the preparation of other concession projects, gives us confidence that concessions may be used efficiently by the public and private sectors for joint infrastructure projects in Ukraine.
Originally Published by 2021 edition of Ukrainian Law Firms: A Handbook for Foreign Clients
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