The economy of a ship entry: what is wrong with the new procedure of port dues collection

May 6, 2020 · Publications

How will the new procedure of port dues collection affect the maritime industry? Why will Ukrainian seaports remain less competitive compared to their Black Sea peers? Find the answers in the article by Tatiana Titarenko, the Managing Partner of Legrant Law Firm.

Harbor Port dues in Ukraine remain one of the burning issues in the maritime industry. But the question is not only at the level of their rates, which is unfavorably different from other Black Sea harbors but also in the pricing model itself. In 2016 the Ministry of Infrastructure of Ukraine presented the draft of new Methodology of Calculating Port Dues. Ever since the discussion about the Methodology has been going on.

This year upon the request of the Antimonopoly Committee the Ministry of Infrastructure prepared another new draft of Methodology. Together with the Methodology, the regulator also proposed a new procedure on port dues collection. The idea of adopting both important documents simultaneously is right. But the question is how they will affect the maritime sector.

New definitions. New terms with controversial meanings are introduced in the draft of procedure. Such things often result in an additional cost for the market, experience shows. For example, the Ministry suggests adding a “water area crossing” definition. It means the passage of a vessel through the water area without berthing and performing cargo operations.

This concept will cause lots of problems for those who operate in the Southern Bug – Kherson and Mykolaiv regions. Here vessels often transit through the water area of one port to reach another. In accordance with current legislation, the transit of a vessel (without berthing and cargo operations) is free of charge if it goes along the fairway. But the introduction of the “water area crossing” term can invalidate the meaning of transit and increase the costs of tonnage dues as it is charged for each entry and exit from the water area.

At the same time, such important terms as shipping lines are not mentioned in the draft of procedure. As the conditions of charging depend in particular on the line types it’s quite strange that the authors have omitted this issue.

Will discounts be provided? The authors of the document actually ignore the discount issue. While the order of the Ministry of Infrastructure No.316 provided numerous incentives, the draft contained only two reasons for applying a decreasing coefficient of 0.5. Discounts will be provided for vessels, which have equipment for all kinds of shipboard wastes disposal while paying sanitary due. The right for a discount will also be extended to vessels moored at the berth with the bow, stern, or lag to another vessel (“ship-to-ship” transshipment scheme)

It's worth mentioning the fact that the pricing mechanism allows the inclusion of discounts in rates of dues if they are provided by any regulatory act. In this case, the only document that contains a detailed list of motivational steps remains the same order No. 316. Its cancellation and the absence of a new alternative document eliminates all incentive mechanisms.

The purpose of a ship entry takes on a new meaning while calculating harbor dues. Let me remind you that vessels entering the water area for completing border-crossing formalities but not for cargo operations do not pay an administrative fee and tonnage dues. The same rule relates to the vessels waiting for its turn for transit passage to another seaport (including a foreign one). In other words what they actually do matters. But in the new project, these are vessels that call for the purpose of anchoring or for border-crossing procedures. Now, this can be interpreted ambiguously and entail costs. For example: if you declare the goal to go through border procedures, but instead anchor the vessel without cargo operations, you are obliged to pay.

And, if now, as mentioned above, it is possible not to pay tonnage dues and administrative fees for passing to any port, then the new procedure allows this only for transit to the Ukrainian harbor.

Surcharge base. In accordance with the world standards, the authors of the document suggest calculating the rates based on the vessel’s gross tonnage (GT) instead of notional volume which is applied now. The notional volume is the product of the length, width, and height of the side of the vessel. Gross tonnage is widely used in the world practice and is a part of the 1969 International Convention on Tonnage Measurement of Ships. When calculating it, the total amount of enclosed space on board the vessel is taken. As a result, we get a value less than the conditional volume, and, accordingly, the sum will decrease.

However, market players suggest considering an alternative option, which allows calculating the fees more objectively. The gross tonnage of a bulker and a container ship with the same deadweight will be different. That is why the total amount of dues will not be fair enough. Therefore, the solution may be using not deadweight, but the actual tonnage. After all, a container ship with a deadweight of 100 thousand tons with 30 thousand tons of cargo on board and a bulk carrier with 90 thousand tons of goods should not pay the same money.

Time limits. They will also start playing a role in maritime logistics costs. Currently business pays harbor dues “in package” for one ship entry. If new procedures are adopted the Ukrainian Seaport Authority (USPA) will introduce daily payments. Also, the new fee will be charged if a vessel stays in the water area for 30 days and more.

The draft of contention. The issue of unused water draft is not new, but the new suggested procedures do not solve it but bring new contradictions. Depths in many Ukrainian seaports cause restrictions for big vessels and do not allow them to use their full cargo capacity. And therefore, according to the order of the Ministry of Infrastructure No. 316 of May 27, 2013, such vessels can get a discount when paying the harbor dues by the amount of unused draft. But it is not easy to get it in practice.

The new draft was expected to resolve this issue. And some steps have already been made: currently USPA reduces the total amount to be paid for the unused draft in accordance with its internal documents. The new procedures make the cost reduction for the unused draft a must for USPA.

But due to some unknown reasons, the authors of the document want to apply this discount only at the Azov seaports. It’s surprising because the bulk of cargo flow is being processed via the seaports of “Big Odesa”, which also have some problems with depths. In addition, the draft authors for some reason suggest calculating the unused draft based on the depth of the access channel, and not the limiting water control structure. For example, the allowed draft for the access channel at the Pivdennyi Sea Port is about 4 m more than at some berths. The initiative is at least surprising.

Blurred classification of vessels. Instead of current division into fare groups, the authors propose to consider the type of navigation (a foreign going ship of a coaster vessel), vessel type (cargo with many subcategories, passenger, cargo-passenger), and the fact of a commercial sailing and cargo operations while sending the bill

But there are certain contradictions on the document that can cause problems for market players. For instance, according to Paragraph 8 of Section 1, a cargo ship is considered as a ship intended for the carriage of goods. In short, it’s a cargo ship in accordance with its documents. But section 2 says that cargo ships are any vessels that perform cargo, passenger operations or towing in the port's water area, and it does not matter what is written in their documents.

So, a fishing boat can easily be regarded as a cargo vessel. Moreover, the authors removed from the draft a very important point which is present in the above-mentioned Order No.316: “The type of a vessel and its specialization is determined by its documents”. Also, the project does not provide a clear definition of a cargo-passenger ship. Thus, new opportunities for unjustified charging of dues appear.

Possible bonuses. However, there are some positive signs in the draft. It abolishes anchorage due since the cost of anchorage will be covered by tonnage dues. In order to completely abolish this definition, the corresponding amendments to the Law on Sea Ports” are required.

There is also a plus in the initiative on canal dues. If now it is charged when passing through any type of channel, then in the new order it does not need to be paid for using internal access channels located in port water areas. Their maintenance cost will be covered the tonnage dues.

Unfortunately, the weaknesses of this draft prevail over strengths. Therefore, we hope that during the period of public discussion of the document, its authors will conduct a thorough analysis of the shortcomings and make changes to the final version. Otherwise, Ukrainian harbors will not be able to increase their attractiveness in the Black Sea region.

Team