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Key points of Focus on Port panel discussion within the framework of the Ukrainian Transport Infrastructure Week

Speeker: Nadia Kaznacheieva, Investment Director at UMG Investments, at Focus on Port panel discussion within the framework of the Ukrainian Transport Infrastructure Week.

14.04.2021

“We have launched a project to build a grain terminal in the Pivdennyi port with a total capacity of 9 million tons of grain per year. Capital investments in this project will amount to more than US $150 million, and we plan to finish its construction in 2-3 years,” Nadia Kaznacheieva, Investment Director at UMG Investments, said in her speech as part of the Focus on Port panel discussion within the framework of the Ukrainian Transport Infrastructure Week.

The panellists discussed the success of the first concessions, the timeframe for the next wave of concession projects, the timeframe and types of ports to be privatized, private-sector initiatives in ports — how to make full use of private-sector experience and knowledge and opportunities for further development of inland waterways with an emphasis on river transport, terminal and fleet modernization, and the contribution and role of international financial institutions — and the way MFIs support this sector.

 

Opening the discussion, the moderator — Senior Adviser at Kinstellar Daniel Bilak — stressed that, recently, ports have become a real driver of Ukraine’s economy. Forty percent of Ukrainian exports pass through ports, and they provide about 2% of GDP.

“We have witnessed major changes in the port sector. It used to have a significant corruption component. That is not to say that all issues have been solved, but the changes are significant. Ukraine has adopted a law on concessions, which transforms this sector. Ukraine can become a global logistics hub when it effectively combines ports with land transport,” he said.

 

The speech by Deputy Minister of Infrastructure Natalia Forsiuk was dedicated to the development of inland waterways in Ukraine and the implementation of the green agreement. In particular, she stressed that the Ministry aims to make inland water transport competitive with foreign transport by 2030. She said that, in 2019, the Dnieper River transported 11.9 million tons of cargo, and almost the same amount of traffic was achieved last year despite the pandemic. In the first quarter of 2021, the volume of river traffic increased by 56%. According to Forsiuk, only 20% of the potential river transportation in Ukraine is currently used due to restrictions, but the adoption of the Law On Inland Water Transport will open the door for negotiations with the EU and international financial institutions to attract investment in modernization. In general, Ukraine can increase the volume of river transport to 50 million tons a year. The Deputy Minister also expressed conviction that the financing of the modernization of transport infrastructure will be directed from the national budget, international financial organizations, and private investors.

 

Deputy Chairman of the State Property Fund Taras Yeleikosaid that, in the near future, three small commercial seaports — Ust-Dunaisk, Bilhorod-Dnistrovsky, and Skadovsk — will be privatized in Ukraine.

“These ports have many internal problems — overdue tax debts, among other things. In cooperation with the Ministry of Infrastructure, we are trying to transfer some facilities from ports to the USPA and vice versa so that each port is a separate integral property complex,” he said, adding that, in the Ust-Dunaisky and Bilhorod-Dnistrovsky ports, the transfer of assets between them and the USPA will take place this month. The auction for the sale of these ports will be announced in two months and, in the Skadovsk port, by the end of the year. “That is, it will be possible to purchase this port and manage it as a private asset with minimal additional conditions from the government. To some extent, the condition of these ports is operational, and this is a good opportunity for investors,” Deputy Chairman of the SPFU said.

 

Adviser to the EU Delegation to Ukraine, former Deputy Minister of Infrastructure for European Integration Viktor Dovhan stressed that Ukraine had a strategy for the development of seaports by 2038, and the government and parliament have previously decided to put 10 ports up for concession.

“As for the concession, we have two successful examples (Olvia and Kherson), but nothing has happened since then. In particular, the USPA did not prepare a decision on the port of Chornomorsk and actually issued an invitation to tender for the preparation of a feasibility study for the ferry three times, but nothing happened for various reasons, including changes in legislation. Recently, the Ministry decided to involve international financial institutions in the preparation of the feasibility study, which indicates a lack of competence on the part of the Ukrainian authorities,” Dovhan said. He added that private companies have already offered to work on feasibility studies in the ports of Mariupol and Izmail. “The government needs to work more actively and allow private investors to participate in the development of feasibility studies for ports,” he said.

Particularly, Dovhan took a look at the port of Berdiansk, recalling that the European Union and the European Commission provided assistance under the Azov Package to promote the development of the region, which borders Russia, in order to attract more investment.

“Together with USPA and the Ministry, we are working on a feasibility study for the port of Berdiansk. We are already in the final stage, and, speaking of the main risks, they are that, after the construction of the Kerch Bridge by Russia, the volume of maritime trade has decreased significantly. In addition, the time required to pass through the Kerch Strait increased, which led to increased logistics costs. But over the past three years, private operators have reduced the share of operations in the port from 100% to 20%, which once again proves that a government-owned company cannot provide the appropriate level of efficiency. A simple solution for the authorities is to give private initiatives the opportunity to work,” he said.

 

Jason Pellmar, Regional Manager at IFCin Belarus, Moldova, and Ukraine, stressed that, in the context of the green course, the development of river transport is extremely important and will unburden Ukrainian roads. He stressed that the World Bank Group acts in accordance with the “cascade principle,” i.e., should the private sector be unable to cope with the task, it is necessary to consider other options, including concessions, and public investment is the last stage given the limited resources in the state.

“Yet, this does not mean that the public sector can sit back and do nothing as a lot needs to be done. Take a look at the port fees in Ukraine. Ukraine has some of the world’s highest port fees. The government could reduce these tariffs, which would lead to an increase in maritime traffic and, accordingly, an increase in the National Budget revenues. Customs clearance in the country can also be improved and its efficiency increased,” the expert stressed.

 

MD HHLA International at HHLA Hamburger Hafen und Logistik AG Philip Sweens believes that, in recent years in Ukraine, there has been a more proactive approach and understanding of the fact that transport logistics is critical to the country’s development.

“I like the idea of concessions and wider involvement of the private sector in Ukrainian ports. There is great potential in the container market, and I would like to be sure that there is fair competition. We want Ukraine to become a logistics hub, and it can do it, but we need to work out a few things. First of all, administrative barriers: remove barriers to trade. Indeed, we invested in expanding the terminal to add two more tracks and waited a year and a half for permission. These processes have to be accelerated so that there is more interest for private business to invest in Ukrainian ports. In addition, it is necessary to create more convenient access to public infrastructure; 20% of containers that come to Odesa then go to Ukrzaliznytsia, and there is great potential for improvement, how to do it faster,” he said.

 

Nadiya Kaznacheieva, Investment Director at UMG Investments, said that 2020, despite all the turbulence, was very productive for the company, and, in 2021, the company plans to invest at the same rate.

“We are optimistic because we have a clear pipeline of projects and investment commitments, so our businesses feel confident. Infrastructure projects are also among them. Transport and infrastructure are my passion. Together with Viktor (Dovhan), we were at the start of the concession projects in ports. I am happy that this happened, and each of the speakers mentioned the success of these pilot projects. As private investors, we see that Ukraine has an updated legal framework for concessions and privatization of ports. There are also successful first pilots — Olvia and Kherson. The possibility of a private initiative to implement the concession is allowed by law, so I hope that such a process will be faster and more productive than the development by the government. Should all 10 government stevedores switch to concession tomorrow, it will be a great success for the country,” she said. “We already have the logistics company Portinvest in our portfolio. We have the expertise and ambition to invest. We also have cargo, so we are interested in the business of port terminals. We will participate in tenders of interest for us. This is regarding concessions.  The second focus is on private initiatives in ports. We have already launched the implementation of the project to build a grain terminal in the Pivdennyi port with a total capacity of 9 million tons of grain per year. The total capital investment in this project is more than US $150 million, and we plan to finish construction in 2-3 years. We expect the government and Ukrzaliznytsia will fulfil their part of the obligations to develop the relevant infrastructure — dredging and railway stations,” Nadia Kaznacheieva said.

Asked about the extent to which UMG Investments considers the Green Deal in its projects, she said,  “We are very active in investing in the recycling of waste and byproducts. ESG is an important topic for us, and we even have a separate portfolio company, Recycling Solutions, which, among other things, is engaged in the creation and development of businesses for the processing of industrial waste.”

 

Nibulon Deputy General Director for Cooperation with Authorities Mykhailo Rizak said that, in 2020, the company showed the best result in all years in terms of transportation by river. Currently, the technical capacity of Nibulon transshipment on the road is 6 million tons of cargo per year. According to him, Nibulon has invested heavily in infrastructure, building 12 sites on the Dnieper. Speaking about the development of river navigation, he stressed the importance of adapting the provisions of Directive 2003/96/EC in Ukraine, which provides for compensation to shipowners and farmers for the cost of excise duty on fuel.

“In all European countries with developed inland waterways, this excise tax has been abolished or reimbursed. This ensures the competitiveness of river transport compared to land transport,” he said, adding that it will save about US $300 per ton of fuel in river transport.

 

Ukraine is moving forward through PPPs and concessions to implement its ambitious National Transport Strategy, and today, the organizers of the Ukrainian Transport Infrastructure Week highlight the following among their achievements:

  • This year, the US $5.3 billion Major Construction Program is the largest road construction program in Ukraine’s history and will be modelled on PPP.
  • After the first successful seaport concessions last year, a program of subsequent port concessions and privatizations was developed.
  • The government plans to renovate or construct 16 regional airports, some of which will offer a concession to a private investor.
  • A number of large railway stations will be put up for concession, and the same model is offered for high-speed train networks.
  • IFIs are fully involved in this process, offering expert advice and allocating significant amounts of funding. Other expected innovative financing mechanisms include state-guaranteed infrastructure bonds and the Major Construction Program Fund.