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Ukrainian seaport: Balancing between economy and geopolitics

Author : Yuriy Hryhorenko

The situation with Ukrainian seaports is a mirror image of what is happening in politics and economy
10:14, 25 June 2018

Read the original text at 112.ua.  

The situation with the Ukrainian seaports is a mirror image of what is happening in politics and economy. Ukrainian seaports have their own problems - infrastructure, management, and legislation - but they continue to develop, although it requires a multi-billion investment.

 

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Ukrainian ports are the most important element of the country's logistics infrastructure. Following the world rating of the quality of ports World Economic Forum, in 2014-2017, Ukraine has slightly improved its position, rising from 107th to 93rd place (among 137 countries). This slight improvement is nothing against the background of a competitor, I mean the Ukrainian railways, which occupy the 37th line in the world rating.

The dynamics of the industry development largely depends on the state of the economy, and every year it can be diametrically opposed. According to the Ukrainian Sea Ports Authority (USPA), in January-May of the current year, seaports handled 54.3 million tons, which is 2.1% less compared to the same period in 2017, while last year cargo turnover in seaports increased by 0.9% - to 132.9 million tons. Seven ports had a negative dynamics of cargo turnover, six had positive. The growth was reached due to the large ports - Chornomorsk, Pivdenny, Mykolaiv. At the same time, in 2016 there was an 8.9% fall - to 132 million tons, while in 2015, there was an increase of 1.4% - to 144.8 million tons. It is interesting that the cargo turnover of the seaports in 2014 increased by 4.2% to 142.9 million tons, when military operations began in Donbas, and the country's GDP collapsed by 6.8%. According to the plans of the USPA, by the end of 2018, the cargo turnover of Ukrainian seaports will amount to 136 million tons.

Related: Sevastopol seaport in annexed Crimea became unprofitable

The transit potential of Ukraine is not going through its best period because of the armed conflict in the east, the loss of Crimea, and weakening of ties with Russia. The segment of seaports has also suffered because it is closely connected with the volume of foreign trade, transit, and the level of development of the economy as a whole.

Experts identify a set of problems that in some way prevent the development of the seaports. These include an imperfect legal framework. "Until now, the law on concession has not been adopted, which would simplify both the attraction of new investors and the working conditions of existing ones." The legislative model of the “Lend-Lord” port is not adopted, when the port administration is engaged in land acquisition, the master plan for port development and stevedoring activities are done through the private companies, which complicates the management of the port and its development," Andriy Isaiev, a consultant to the center "TTC-Consulting," notes.

According to Andriy Popov, partner of the audit and consulting company Kreston GCG, the low efficiency of its main curator, USPA, also has a negative impact on the activities of seaports. This is clearly stated also by its head Raivis Veckagans, mentioning as the main problems the high bureaucratization of project coordination, corruption, and lack of financing. These factors hamper the development of the public-private partnership because berths for mooring belong to the USPA, and loading terminals are often for the private companies.

Related: Mariupol seaport rises cargo handling by 32% in January 2018

Problems are created by the high port charges. High port charges affect the competitiveness of the Ukrainian export goods, and partly in the transshipment of transit cargo. "At the moment, Ukrainian ports are almost the most expensive in the Black Sea basin, and companies prefer to carry their cargoes to cheaper ports in Bulgaria, Romania or Russia. As a result, in 2016 cargo traffic decreased significantly compared to the same indicator of not the most successful 2015 year. And although there has been a slight increase in 2017, this situation does not yet change globally," Andriy Popov claimed. And although from January 2018, collections in Ukrainian ports (except for the Danube ones) were reduced by 20%, this did not change the situation with the attractiveness of cargo handling in our ports.

As Andriy Isaiev points out, one of the problems is the inadequate development of the ground infrastructure - railway and automobile entrances in many ports do not cope with the cargo traffic. This infrastructural problem cannot be solved quickly because of its high cost and the need to undertake coordinated efforts of many departments - the Ministry of Infrastructure, Ukravtodor, Ukrzaliznytsia, and USPA.

Related: 26 cargo ships violated Ukrainian law by entering Crimean seaports in 2017

The main problem with the state ports is the lack of investment. Since January 1, 2018, the rate of deduction of net profit of ports to the state budget reduced from 75% to 50%, i.е. they will be able to direct more funds to the development and modernization of the infrastructure. The UPSA planned to allocate for the current year capital investments in the amount of 165 million USD. In 2017, this figure was 70 million USD, and in 2016 - 25 million USD, but taking into account the real needs of the industry is a drop in the bucket. Also this year, for the first time UPSA intends to attract a loan from international financial organizations in the amount of 61,5 million USD. In general, Ukrainian ports develop without various forms of preferences - loans or guarantees, tax incentives or subsidies.

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Another problem is the errors in financial planning and management in the ports themselves. "Our audit practice shows that many ports have difficulties with the receivables, make critical mistakes in the procurement process, etc. All this increases their costs and, accordingly, reduces profitability," emphasizes Andriy Popov.

Dredging works are of great importance for increasing the turnover of goods. From the deepening of the bottom depends on the maximum weight of the vessel that the port can accept: the smaller the depth, the less tonnage of the vessel and the benefit for the shipper and the port. Mariupol has reduced the draft to 7.5 m in 2017.

"These are costly measures, but they are necessary. Look at the example of Mariupol and Berdyansk sea trade port. Siltation in the Pryazov basin is particularly active, so dredging is a prerequisite for port competitiveness," Andriy Popov explains.

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At the same time, this problem was solved. At the end of 2017, a specialized vessel Meotida was transferred to the Sea of Azov for work in the Sea of Azov, which immediately proceeded with the dredging in Mariupol. This vessel will carry out dredging works in Berdyansk port, which will affect its ability to transship cargo.

In general, the situation in each port is different, and there are different possibilities for loading and unloading capacities. "There is a monopoly entrance in Odessa port, where there are rather high tariffs, there is another entrance to the port, which is closed. Comparing two terminals in Odesa, Terminal Odesa Container and Brooklyn-Kyiv Port are operating. Brooklyn-Kyiv Port has a lower speed of processing vessels, storage areas for containers, infrastructure, and machinery, which entails time wasting for entry and clearance of cargoes. Due to the low throughput, it might take for several days to enter the port. There are also some troubles with the railroad platforms loading: because of their shortage, the delivery queue can be up to two weeks, as a consequence, consignors (importers) incur additional costs in the form of storage costs at the terminal and demurrage (charges for the use of container equipment). There is no special design in the port of Odesa - the "single window" system works," says Oksana Bereznyak, the head of the shipping department of ZAMMLER group of logistics companies.

For his part, ex-Deputy Minister of Infrastructure of Ukraine Oleksandr Kava believes that there are no special problems in the development of Ukrainian ports - they are developing dynamically, there receive large investments. Of course, there are some problematic issues in each port, but they are gradually being solved, he says: "Seaports are probably the least problematic sector of the Ukrainian economy."

Related: Ukraine to quit CIS: Good thing for Russia and blow to our economy

One of the main problems for the Ukrainian ports of the Azov Sea (Mariupol and Berdyansk) is that Russia is blocking the opportunities for passing ships through the Kerch Strait.

New requirements for passage of vessels under Crimean bridge stipulate that the maximum permissible height of the vessel should be 160 m, width - 31 m, draft - 8 m, above-water clearance (distance from the operating waterline to the outer point of the mast) - 33 m. Previously, Mariupol and Berdyansk ports served larger vessels, in particular, of Panamax type (longer and with a higher surface part).

As a result, in 2016-2017 the Mariupol port reduced turnover by 15.4% to 7.6 million tons and by 14.3% to 6.5 million tons, respectively, in Berdyansk - by 14.6% (to 3.8 million tons) and 37% (up to 2.4 million tons), respectively. In general, the Ministry of Infrastructure estimates direct losses from the construction of Crimean bridge at 19 million USD per year.

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Over time, this problem can become even more complicated. In response to detentions of vessels under the flag of the Russian Federation, Russian border guards detain and inspect ships going to Berdyansk and Mariupol, thereby creating idle time and losses for the shipowners and shippers. All can end with a complete blockade of shipping of the Ukrainian ports of the Azov Sea.

However, there is a partial solution to the problem. "Ukraine has the only one tool at its disposal: it might increase the potential of the ports in the South-Western region (Chornomorsk, Odesa, Pivdennyi, possibly Mykolaiv and Kherson) and invest in the railway communication between Mariupol and the "big land," Andriy Popov states.

We must understand that at the moment there are no solutions to the complex problem of limiting the "Azov" shipping, as there are no obvious prerequisites for this in the future. Although Ukraine has filed a lawsuit against Russia in international arbitration in defense of its rights in the Black and Azov Seas, as well as in the Kerch Strait, the prospects of Ukraine's positive resolution of this case are not that obvious.

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It is necessary to solve the above-mentioned problems for the development of the seaports, and also to invest in technical modernization and development of the infrastructure. It is possible that part of the organizational problems will be solved as a result of the creation of the State Marine and River Transport Service (Maritime Administration of Ukraine), which will be established on August 1 this year and will be coordinated by the Minister of Infrastructure.

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Most likely, there will be a large-scale transfer of port facilities to concession and lease, as well as, a possibility of the privatization of ports, especially the unprofitable ones. Nonetheless, the issue of privatization of ports has been discussed for a long time, but as for 2018 there is no list of large privatized port facilities, and the Ministry of Infrastructure seems to have refused privatization in favor of the concession. But we should not treat it as a final decision.

According to Andriy Popov, the implementation of Art. 27 of the law "On the seaports of Ukraine", which mentions the mechanism for compensating private investments in strategic infrastructure. However, the working principle of this mechanism has not been worked out yet.

You also need to invest in the construction of "dry" ports. According to Andriy Popov, "they allow us to increase the territory of the classical seaports by constructing remote land loading terminals, the Odesa seaport has already started on this route, and its own location does not allow the construction of additional loading terminals," Kreston GCG partner explains.

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In quantitative terms, the development of the seaports depends on their turnover and the attraction of the local and transit cargo. Prospects for these categories are different. "All the local cargoes basically go through the ports. The increase in cargo base is possible due to the attraction of transit, but for this Ukraine needs to increase its transport attractiveness. Today, transit cargo flows do not eagerly go through Ukraine, in particular, because of bureaucratic difficulties, non-transparent tariffs (there is no “through tariff,” which would include transshipment in the port and transportation to the point of exit from the territory of Ukraine)," Andriy Isaiev says.

At the same time, according to Oleksandr Kava, Ukraine is limited in its ability to attract additional transit cargoes exclusively for geopolitical reasons (conflict with Russia), and even a decrease in port charges in this matter will not help. And own opportunities to increase freight turnover are insignificant and limited by economic reasons (production volumes, dynamics, and demand for exports, etc.).

In general, Ukraine has much to develop in the direction of logistics. According to the Logistics Performance Index of 2016, Ukraine took the 80th place out of 160 countries, losing its positions in comparison with 2014 (61st position).

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