How to Attract Private Investors to Ukrainian Ports

It is no secret that development of Ukrainian ports requires private capital. It has been a long journey for Ukraine, but it has finally decided to open its doors hospitably to investors interested in the port industry. The parliament passed the long-suffering law “On Seaports” in 2013. The Ukrainian Port Authority, which has the hydraulic structures in seaports on its books and is responsible for cooperation with the private entities, began operation at the same time.

However, no investment project came to life for two years after that. What was the problem? As it turned out, unresolved issues involving the regulatory framework hamper the flow of investment. We analyzed the pros and cons of the law regulating the industry and shared our opinion on the Delo online information portal.

For years, the authorities have been stressing the need to develop ports with private investment. However, despite amendments to the legislation, investors are in no hurry to invest in the port industry. What are the main problems affecting public-private partnerships and how can these problems be solved?

Twenty-four years after Ukraine attained independence, the country’s maritime industry is facing problems that are typical for many industries. Their main technical equipment is wearing out rapidly, and, as always, there is insufficient money for its renewal. This significantly reduces the competitiveness of Ukrainian seaports compared with other Black Sea seaports, where approach canals have depths of up to 20 meters and the processing of goods takes much less time.

After lengthy discussions, the authorities finally decided to choose the European model, in which the state (represented by the port authority) determines the areas that should be developed and attracts private investors for this purpose. This is because businesses not only have funds for financing construction and reconstruction of transshipment facilities, but they also provide the cargo base.

For these purposes, the Ukrainian parliament adopted the law “On Seaports” in 2013 and the government established a new state-owned company called the Ukrainian Port Authority. However, not a single seaport can boast of a successful investment project. A number of legislative barriers that can and should be overcome are hindering the arrival of private businesses. Let us consider some of these legislative barriers.

Many experts say that the stumbling block is the lack of a procedure for compensating investors for their investments. Such a procedure is established in Article 27 of the law “On Seaports,” but the Cabinet of Ministers has still not approved it, as required by this law. Naturally, businesspeople who do not understand how they will be able to return their investments in strategic port infrastructure will not take risks.

As a result, a perfectly reasonable question arises: is there a need for the Article 27 itself? After all, the Article 26 that precedes it stipulates that private investment in public port infrastructure facilities should be based on concession, lease, or joint venture agreements or any other form of investment agreement concluded on the basis of special procedures established specifically by the laws that govern these types of relations and already provides for the possibility of compensating businesses for their investments in state property. For example, Article 27 of the law “On Lease of State and Municipal Property” stipulates that if a tenant improves a facility with its own resources, the landlord or the owner of the facility is obliged to compensate the tenant for the money that was spent on the improvement of the facility.

Although the procedure established in Article 27 of the law “On Seaports” is under consideration by the government and has already passed expert assessment by the Ministry of Justice, two attempts to approve it have failed. Considering this negative experience, adoption of the document may be delayed again.

However, is it necessary to adopt the procedure established in Article 27 in principle? Numerous arguments and attempts by interested parties to modify the document in their favor will only delay approval of the procedure and, accordingly, investment in the port industry. Therefore, the simplest and best decision would be to remove Paragraph 1 of Article 27 of the Law “On Seaports.” Everything necessary for compensations is already regulated by the regulatory requirements for investment contracts, and the procedure causing all this fuss is not a panacea.

The second major barrier to implementation of investment projects is the land issue. Any work that a private entity plans to perform (for example, construction of hydraulic structures) requires allocation of land and availability of title deeds to the land. Unfortunately, none of the seaports in the country has defined boundaries, which complicates creation of new artificial land or allocation of existing land for special purposes. In addition, the law “On Seaports” stipulates that the territory of a seaport may consist of maritime transport land, industrial land, and water reserve land, which includes, among others, artificially created land. However, the draft law No. 2968 “On Artificially Created Land in Port Waters” was also not adopted. The reason for its non-adoption is that expansion of Ukraine’s territorial borders which requires amendment of the Constitution.

Judicial practice has shown that when local government agencies allocate water reserve lands for construction of hydraulic structures, courts invalidate and cancel their decisions.

How do we get out of this situation? There is an option that can speed up the arrival of investors in Ukrainian seaports. This option involves amendment of the law “On Urban Planning” and the Land Code. Such a step will allow construction of hydraulic structures without title deeds to land. This will accelerate investment activity in the maritime industry. In addition, the relevant draft law has already been prepared, it has been approved by the Ministry of Infrastructure and businesses, but it has not yet been registered in the parliament.

Finally, the third major barrier is the notorious Ukrainian bureaucracy. The authorities’ lack of willingness to adopt a simplified mechanism for registering lease and concession agreements is evident. Under the legislation, a lease agreement can be concluded within six months. However, in practice, this period is extended by two years, which allows investors to learn about all the “charms” of the corrupt, clumsy machine. A political will and a desire to break the system are required from the government.

Therefore, it appears that these problems can be solved if the existing legal barriers to development of public-private partnership in seaports are analyzed in detail, especially considering the fact that the authorities and businesses share the same goals: everyone is interested in development of transshipment capacities and increase of cargo traffic.