Pacific Maritime Magazine - Marine Business for the Operations Sector

Changes Coming to Ukrainian Ports

 

The Port of Odessa, on the northwestern shore of the Black Sea, currently accounts for most of the maritime traffic in Ukraine. Photo by Aktron / Wikimedia Commons.

Amid the economic instability

and ongoing military conflict in Ukraine, the government is considering allocating funds to the national port industry by privatizing the country's largest seaports.

According to the government, the introduction of a privatization model in the Ukrainian port industry is acutely needed, as it will attract additional funds for the development of the country's ports in the short and middle term.

The majority of funds are expected to be provided by private investors, and could not be coming at a better time, as the Ukrainian government does not have enough funds for further development of its seaports, because of the current economic crisis in the country and the devaluation of the hryvna – the national currency – by more than 60 percent in the past year. The situation is aggravated by the ongoing military conflict in the east of the country with pro-Russian rebels.

In the meantime, state plans for concession and privatization of national seaports have already sparked criticism from top officials and representatives of some of the country's leading seaports.

According to Sergei Bryzgalov, chairman of the trade union of Illichivsk Commercial Sea Port, one of Ukraine's largest sea ports in terms of cargo traffic, the transfer of the national ports in concession is a crime against the industry's workers, and will result in massive layoffs amid times of economic instability in Ukraine.

This position is shared by Sergey Karlovski, the executive director of the Trade Union of Maritime Transport of Ukraine. Karlovski says the conversion of national ports to a concession model may lead to a serious crisis in the national port industry and reduction of up to 70 percent of the industry's personnel.

Karlovski believes that future concessionaires will primarily focus on their commercial profits, rather than the continued employment of workers, to the detriment of the workers and the local economy.

According to representatives of the Ukrainian Trade Unions, another reason for concern relates to the plans of the Ukrainian government to transfer into private hands only those ports that have been profitable and which have benefitted from millions of dollars in state investment.

At the same time, according to Union representatives, the attention to small ports, (many of which are currently on the brink of bankruptcy), from the state currently remains insignificant.

Under the terms of planned concessions, Ukrainian ports and their property will be transferred into concession for a period of 49 years, while the concession rate will be fixed at the level of 10 percent, with the possibility of a reduction to 5 percent under certain circumstances.

Investors and concessionaires, from their side, should provide guarantees of the increase of port capacity in due course. They should also ensure access to the ports to Ukrainian exporters of iron ore and coal on an equal basis.

It is planned that Yozhny sea port, one of the country's largest ports, located in the northwestern part of the Black Sea, 30 km to the east of the city of Odessa, (which currently remains one of Ukraine's most profitable sea ports, with a depth of 21 meters) will become one of Ukraine's first seaports to change to the concession model.

As part of the preparations for the port's tender, its property is expected to be evaluated by auditing firm Deloitte. According to some Ukrainian media reports, the port may be acquired by Rinat Akhmetov, a Ukrainian businessman and oligarch, who was listed as the 101st richest man in the world with an estimated net worth of US$11.6 billion in April, 2014. A concession tender for the Yozhny port could be completed within the next 2 to 3 months.

At the same time concession tenders for other Ukrainian seaports will be completed in the second half of the current year, with some leading Ukrainian and foreign logistics and shipping companies expected to be among the potential bidders.

The annexation of the Crimea by Russia has significantly reduced the potential of Ukraine as a maritime power, as the country has lost its five major ports, and in particular the ports of Sevastopol, Theodora, Yalta, and Kerch.

At the same time, future maritime transportation in the Sea of Azov is also in danger, due to the presence of Russia and its hostility against Ukraine. In fact, the port of Odessa, which is a major seaport and transportation hub located on the northwestern shore of the Black Sea, currently accounts for most of the maritime traffic in Ukraine.

Last year was relatively successful for the ports of Bolshaya Odessa, among which are Odessa, Ilyichevsk and Youzhny, with a total cargo throughput of 130 million tons, which is a 5-percent increase over 2013. However, according to predictions of Ukrainian government analysts, this year will be significantly tougher for them, due to a further deterioration of relations with Russia, the ongoing military conflict in the eastern part of the country and the economic crisis. Because of this, a decline in cargo of 15 to 20 percent is expected for Ukranian ports for 2015.

The privatization of Ukranian ports is also an important priority, as the influx of capital is expected to significantly improve the condition of the port facilities, a majority of which are in poor repair and in need of modernization. Currently the Ukranian government lacks the funding for their modernization, and the EU has declined to provide support for these projects. In this regard, according to analysts, the attraction of private investors is the only way to obtain additional funds for the Ukranian port industry.

According to recent statements of Jan Tombinsky, the EU Ambassador in Ukraine, the EU has no plans to provide any funds for the modernization and development of Ukranian ports this year. At the same time there is a possibility that some South Korean companies could be among the foreign investors to provide funds for port development. Some have already expressed an interest in the project during a recent meeting with Andriy Pivovarsky, Ukraine's Minister of Infrastructure.

According to state plans, the attraction of private investors will allow for the complete modernization of the majority of the Ukranian ports, which will also involve dredging.

The attraction of private investors and a rise in transparency in port management is expected to solve one of the major problems of the Ukranian port industry, which is a high level of corruption and excessive duties, which are among the highest in Europe for shipping companies, being sometimes illegally set by corrupt officials.

At the same time, according to Yuri Kruk, the newly appointed head of the Association of Ports of Ukraine (Ukrport), the problem of corruption will soon be resolved by the Ukranian national parliament (Verhovnaya Rada), which plans to approve a package of laws, aimed at easing state regulation of the national port industry and fighting corruption, which currently remains one of the most pressing problems for Ukraine. Part of the plan includes the expansion of powers of the recently established National Anti-Corruption Bureau of Ukraine, and the adoption of a law combating corruption in transport.

Annexed Crimean Ports

In the meantime, in the case of the annexed Crimea ports, now under Russian jurisdiction, their annexation has not resulted in an increase in cargo volumes or the improvement of their financial figures, as promised by Russian officials. On the contrary, the current isolation has already put some of them on the brink of collapse, as the majority of global shipping companies prefer not to enter the Crimean seaports, amid a threat of sanctions.

The Russian government continues to use funds from the Russian National Wealth Fund, Russia's sovereign wealth fund, for the support of the Crimean ports, but the resources of the fund are steadily declining and there is a possibility that such support may not last past 2017 or 2018.

According to initial plans of the Russian government, the annexation of Crimea and its ports should provide an impetus for the development of ports in the Russian Southern basin, but because of sanctions imposed on Russia by the EU and the US, as well as countersanctions initiated by Russia's President Vladimir Putin, the implementation of these plans is threatened.

Finally, the sanctions will also probably force the Russian government to back away from the earlier announced plans to make Crimean ports the country's primary seaports with the easing of customs and administration procedures, which should have contributed to the increase of exports and cargo traffic.

At the same time, according to analysts of the Association of Seaports of Russia, the weakening Russian and Ukranian seaports in the international arena may result in the strengthening of the Baltic seaports of Klaipeda, Riga and Tallinn.

 
 

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