What is the way of attracting investment into seaports

November 10, 2020 · Publications

Ukrainian seaports require modernization and renovation. How does the state provide opportunities for attracting private investments in the seaport industry and are the conditions for public-private partnerships transparent enough?

Look at it from the beginning

The idea of ​​the upgrading of investment legislation, in particular with respect to public-private partnerships in the seaport industry, is not new. It had often been discussed in the relevant ministry and the parliamentary committee. Someone supported it, someone suggested alternatives, but everyone finally agreed that the state would not be able on its own to provide the required amount of investments in particularly worn port capacities. And examples from European countries demonstrate that active business participation increases the probability of success.

So, in 2013, Ukraine made the final decision to split the administrative and economic functions of the ports. The state should have undertaken the role of landlord and provide conditions for development, and stevedoring activities were put on private investors who should have built terminals and attract cargo flows. The Verkhovna Rada adopted the Law on Seaports, which was supposed to become a solid foundation for the systemic reform of the industry.

However, it was not possible to completely separate these functions, and now the "infrastructure landlord" - the State Enterprise "Ukrainian Sea Port Authority" - is not an administrator, but a commercial enterprise and moreover, a subject of a natural monopoly. And the only Law on Seaports as the foundation is not enough to make the relationship between the state and private investors as transparent and understandable as possible. It is necessary to finalize other regulatory legal acts that would cover in detail the practical aspects of cooperation between the state and business. Especially the conditions for the transformation of lease relations require such changes because a lease is the most common form of interaction between the state and a private investor in seaports now.

Concession

This format of public-private partnership was considered a priority for the port industry. So, last year, the President signed the Concession Law. This is certainly a significant step forward, but there are still some risks for investors.

For example, a company makes some effort and invests resources to win a tender and obtain the assets on a concession. But after that, it needs to get a conclusion on the assessment of the project's environmental impact, and if the conclusion is negative, it will actually nullify the time spent on competition and block the project. Therefore, it would be appropriate to impose the valuation obligation on the concessionaire before the start of the competitive procedure. Such shortcomings of the new concession legislation have already repeatedly been discussed in the business community, so I propose to dwell only on the issue of the transition from lease to concession, which is highly relevant for the seaport industry.

Art. 21 of the Concession Law regulates the conclusion of a concession agreement without holding a tender - through direct negotiations with the lessee of the relevant state property. The out-of-competition procedure is quite logical because the tenant has already passed the “competition” for state property at the stage of concluding a lease agreement. However, the Law does not provide for an investor with an opportunity to expand the object of the concession with additional facilities that would make it possible to “complete the cycle” of stevedoring activities.

This applies above all to berths. The exceptional importance for the port operator to be able to use this hydraulic structure can be judged even from Art. 25 of the Law on Seaports. In the event of privatization of a single property complex of a state-owned enterprise, the conditions of the tender may provide for the lease of those berths that technologically provide a full variety of services. In this case, the lease agreement is concluded simultaneously with the purchase and sale agreement. However, the Concession Law does not provide similar provisions. Port lease operators are unlikely to increase investments under such conditions and move from lease to concession of the same state property objects. Therefore, without making the appropriate changes, the norm of Art. 21 of the Law will gather dust rather than effectively used by investors.

Privatization

Privatization could be an alternative to a concession. Besides, the legislation has now been updated, and privatization has generated great interest among investors.

Let me remind you that in 2019 the Act that approved the list of objects not subject to privatization became exhausted. This Act also applies to seaports. So, in theory, private business has the opportunity to acquire ownership of port infrastructure facilities and develop them with a different level of responsibility, but in practice, the implementation of such projects is constrained by certain restrictions.

Let's again get back to lease issues. Usually, when leasing state property in ports, the Ministry of Infrastructure, as a governing body, insisted on the inclusion in the agreements the conditions of investing in lease objects of multimillion-dollar funds on terms of inalienable improvements. Privatization will be a follow-up to the development of these objects, will raise them to a qualitatively new level, and will ensure that investments made in the past were not a waste. But Art. 18 of the Law on the Privatization of State and Communal Property restricts such opportunities.

According to this rule, a tenant who wants to be eligible for privatization should improve the object at his own expense in the amount of at least 25% of a certain estimate of its value. Moreover, he is obliged to do this within 3 years from the date of assessment. Those involved in infrastructure projects are well aware of how long it takes to coordinate each stage with public authorities. The procedures are lengthy and difficult, so quite often the investor can embark on the practical phase of the project in less than a year, but as usual, it needs more time.

For example, the investing in the reconstruction of port property required: approval by the Ministry of Infrastructure and the State Property Fund of the most improvements, approval by the Ministry of the refusal of the asset holder from the right to permanently use the land (if it is formed at all), so that the investor can subsequently conclude a lease agreement for this land, and so on. It is necessary to put the object into operation after the completion of the reconstruction, and this also takes time. So, the implementation period is often about 5-6 years, as a result, the state gets an improvement, but the tenant loses the right to privatize. So he is at disadvantages as if he had invested in an improvement prior to the assessment. That is to say, the state simply does not take into account the investments of the past years. However, there is no mechanism for reimbursing these funds.

Another barrier to the tenants: the landlord is to agree on "inalienable improvements that give the right to privatize the property through buy-backs" by the law. However, the legislation establishes a uniform algorithm for the landlord to give consent to make inalienable improvements, without distinguishing between inalienable improvements “that give the right to privatize property through buy-backs,” and improvements without such right. Under such conditions, the indication of any special approvals creates risks of unlawful refusal to purchase on the grounds that the approval received by the tenant did not contain a direct indication of the lessor's right to privatize the property through the buyout.

Providing fair and transparent conditions for potential investors would allow attracting private capital to Ukrainian ports, carrying out their technical re-equipment, and increasing the competitive position of our state in the seaport industry. So, a business that is interested in port assets should initiate a public discussion of the current regulations and necessary changes.