The Ministry of Transport and Communication of Ukraine recently announced an initiative to terminate all joint activity agreements concluded with private companies in respect of state-owned seaports, and to replace such agreements with lease arrangements. While this step may, at first glance, appear to simplify matters for potential private investors, after some scrutiny, this initiative may trigger additional problems for the seaport industry.
At the present, all seaports in Ukraine are state-owned. During the last decade, the volumes of cargo handling and transshipment in Ukraine’s major Black Sea ports (such as Odesa, Illichivsk and Pivdenny) have shown steady growth. But the current economic crisis has affected these ports’ profits.
Seaports, as the gateways of Ukraine, are not only geopolitically important. They contribute to the nation’s economy. It is not possible to secure sustainable development of any production of goods, unless there is developed infrastructure supporting their transportation. Port development means a lot — new working places, hard-currency earnings, greater energy independence (if energy terminals are constructed), etc. Furthermore, for vastly populated southern regions (Mykolaiv, Kherson, Odessa) seaports constitute to be the major source of regional income.
It has become clear that substantial investments are needed in these Ukrainian ports in order to secure their development and their ability to compete with the Romanian and Russian Black Sea ports. And it is also clear that the Ukrainian government is not capable of providing sufficient financing for this purpose. Thus, the involvement of private investors in the industry’s development is inevitable and necessary.
Nonetheless, from a legal point of view, the seaport industry remains a state monopoly with limited access options for private capital.
At present, under Ukrainian law, the land and water areas of ports are state property and may be granted to private parties for use only. The same applies to the internal sea waters and the territorial sea of Ukraine, which are treated as water objects of national significance. Also, the water territories of ports, moorages, hydrographic structures, and seafronts, etc., can be neither privatized nor leased.
A concession is the only legal option currently expressly available to a prospective investor seeking to develop a seaport in Ukraine. Acting on the basis of a concession, granted to it by the government, an investor may obtain the exclusive right to develop a certain property (i.e., a seaport), as well as the right to receive profits from the operation of such property. At the same time, any property created in the course of a concession becomes state property and the concessionaire may claim only operational rights to the developed property for a maximum of 50 years. In addition, the bureaucracy also plays its role: at the moment, state-owned properties may be granted for concession only if they are included into a list approved by the Cabinet of Ministers of Ukraine. Notably, this list does not include any seaports, and the lobbying of this matter may take an unduly long time for a private investor.
Notwithstanding the foregoing, the activities of private companies in the Ukrainian ports have been organized via the formation of joint ventures with the relevant state port enterprises or entering into management agreements or joint-activity agreements.
However, none of these legal instruments can secure any private property rights, given the existing limitations on the private ownership of the relevant land, water resources and seaport infrastructure, thereby leaving private investors with no economic incentives to invest into the Ukrainian ports.
Moreover, all of these agreements are burdensome from the regulatory perspective, as their execution is subject to multiple administrative approvals. Notably, since the appointment of Joseph Vinsky as minister in December 2007, the Ministry of Transport and Communication of Ukraine has not issued a single approval for an agreement with a private operator in a seaport. Thus, the initiative of the Ministry to terminate the existing agreements made recently, although highly criticized by experts for its non-enforceability, may still have an adverse effect on the activity of private companies in Ukraine’s seaports.
These same experts anticipate the adoption of a new law on seaports, which has been pending with the Ukrainian parliament since 2006, to be the only efficient solution to change this situation. This draft law is aimed at establishing the border between commercial and administrative functions in Ukrainian seaports, as well as providing greater opportunities to private investors to enter the activities of the ports in a new capacity.
In contrast with the currently applicable legislation, the draft law allows private development of sea terminals, although subject to stringent administrative requirements. More particularly, the construction (reconstruction) of sea terminals requires approval of the Ministry of Transport and Communication.
Upon the adoption of this new law, private investors will also obtain the right to acquire title ownership rights to the hydro-technical structures constructed at their cost, provided that such structures are properly registered, as well as to lease or own the underlying land plots. The bill also explicitly provides that the activities of private port operators in the water area, the land territory of the port, (or the sea terminal will be based on the agreement made with the port’s state administration or with the owner of the sea terminal). The practical implementation of this new law will, apparently, require the adoption of a massive amount of subordinate legislation. Thus this law is unlikely to be enforced without such subordinate acts.
Anna Melnyk is an associate with the Kyiv office of Baker & McKenzie. For further information, please contact the Kyiv office of Baker&McKenzie law firm at [email protected].
