August 2021 – 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located on the coasts of the Black and Azov Seas, Ukraine’s port industry struggles with various problems, including outdated and worn-out equipment, a lack of deep-water anchorages, the inadequate condition of public transport infrastructure, fragmentation of port lands and assets,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.
Options for private sector engagement
Ukrainian law provides the following main options for private investors to invest in state-owned port infrastructure:
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:
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:
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.
The article is published in the 2021 edition of Ukrainian Law Firms: A Handbook for Foreign Clients