For many years there have been discussions about concession in Ukraine. And always the discussions have been theoretical – could, should, would. Only now the concessions have really taken off with the infrastructure leading the way and first ports in concessions and the next concession tenders on the way.
As long as I remember, we have had a discussion on how the concession would be an interesting financial instrument for investors, as well as for Ukraine. For the investor, it would mean granted and agreed financial income, hence more security in making significant investments. As one of my real estate development friends said: “I would like my big non-liquid investments to be in a stable country.” Although the country is not yet very stable, a concession does give additional security. For the government, it gives an opportunity for additional repairs and reconstruction, while not spending the resources out of the budget right away. The net present value is well-known to investors. And there is always a need for additional resources, no matter how successful the country is.
Concessions are especially important in cases with high capital expenditures. As an example, in Europe, over 50,000 kilometers of roads are built with concessions, as well as even bridges and tunnels, not forgetting about the Channel Tunnel, the 50-kilometer railway tunnel that connects Great Britain and the European mainland.
Out of the 100 biggest ports, 94 are in concession and, as another example of the scope, in 2006 the concession agreement was signed between the Port of Barcelona and Hutchison Port Holdings, in accordance to which the private company will invest over 500 million euros to the development of the container terminal BEST.
In 2013, the Bulgarian government and Private BMF Port Burgas signed a concession agreement in regards to the development of the Burgas port with the amount of investment of 127 million euros for a period of 35 years. There are hundreds of examples from roads and ports up to even schools. In the Estonian capital of Tallinn, for instance, the private investment fund renovated six schools under the agreement of concession for 30 years.
Now after all the discussions during all of the years of independence, driven by the minister of infrastructure and transportation, Vladyslav Kryklii, the first significant concession agreement was signed.
As the result of the tender, the Kherson Sea Commercial Port was given into concession for 30 years to the Georgian-Swiss company Risoil-Kherson, with the obligation to invest 216 million hryvnias during the first 3.5 years and 62 million hryvnias during the upcoming 10 years with an annual concession fee of 12 million hryvnias, taking into account the indexation and sharing 7% of net profit. Meanwhile, the company must keep the employment contracts for a minimum of five years and renew the infrastructure connecting to the port, including the building of new roads. As well, the volume of the port should go up to 1.36 million tons in 10 years.
While it sounds like a significant list of obligations, it is still interesting for a private investor and is definitely interesting for the government for a number of reasons.
The most important reason is always limited resources in the nation’s $50 billion annual budget. When investing high capital expenditures, you will have less money to spend on needed operating expenditures, from pensions to salaries to new roads.
Then, of course, being honest, the government is never a more efficient operator than a private company. I cannot really remember a single case. Let’s be honest, there are not many examples when the government is more efficient in an open market with private competition. This is why I am quite sure that also the port will show better results operated by a private company, resulting also in more income to the budget.
Then again, let’s not confuse concession with privatization. In privatization, the assets are transferred from the government to private ownership. In concession, the ownership is not transferred and the assets are still government-owned and on the government’s balance sheet. By the end of the concession period, the improvements will also be transferred to the government’s balance sheet.
The concession agreement of the Kherson port is just the beginning of the “concession season” with more tenders on the way, lead by the Ministry of Infrastructure.
As the co-founder of the Ukrainian Venture Capital and Private Equity Association, and its executive manager for two years, I do remember how we fought for the amendments to laws to enable the European principles of concession. Now, with the first real-life example, I do believe this is the beginning of an interesting era for investors.
Welcome to Ukraine
Jaanika Merilo is an adviser to the minister of infrastructure in Ukraine.
.
