During the Soviet period, the Ukrainian Soviet Republic accessed the Black and Azov Sea routes through its seaports, which were strategic territories subject to a special regime controlled directly from Moscow.
Since Ukraine’s declaration of independence in 1991, all seaports in the country have been owned and operated by the state of Ukraine (with the sole exception of the Illichevsk fishing port which was transferred to private ownership in the 1990s). State owned and operated ports have faced many commercial and management problems and have often been operating at a loss.
Over the last few years, the Ukrainian Government has been working on legislation aimed at implementing reforms in this area.
The Law on Ports
The Law of Ukraine “On Sea Ports” (“Law on Ports”), adopted in 2012, came into effect last summer. It aims to reform the Ukrainian port sector by separating the commercial activities of ports from their administrative functions.
While the ports’ infrastructure facilities (such as aquatic areas, most hydraulic facilities, moorage walls, etc) are to remain in state ownership and under the operational control of the Seaports Administration (a newly established state department tasked with ensuring the general functioning of seaports and the maintenance and operation of strategic port infrastructure), all other seaport property can be transferred into private ownership.
Investing in port projects under concession agreements
Before the adoption of the Law on Ports, all port infrastructure facilities had to be state-owned and this made it extremely difficult for private investors to invest in the construction of port terminals. Investors were forced to use, for example, lease agreements, which were not designed for this purpose and did not sufficiently protect investors’ interests. Moreover, they were often declared invalid (usually as a result of changes in Ukraine’s political situation).
Additionally, in 2008, the Ukrainian Government announced that all agreements relating to seaports had to be approved by the Cabinet of Ministers of Ukraine. As a result, only those investors willing to take on significant risk invested in Ukrainian seaports.
Under the Law on Ports, private investment in seaport infrastructure facilities (other than strategic facilities) may be made on the basis of concession agreements, joint operation agreements, lease agreements or other types of investment agreements.
However, the Ukrainian Government has stated that concession agreements are to be adopted as the main way for private operators to invest in ports, allowing for improvements to be made to worn-out port infrastructure while retaining state ownership.
Eighteen Ukrainian seaports were added to the “List of State Owned Property that May Be Subject to Concession” by the Resolution of the Cabinet of Ministers of Ukraine on 24 November 2012. A similar Resolution was adopted with regard to certain property in the remit of the Seaports Administration.
Concession agreements in practice
Despite the priority given to concessions by the Ukrainian Government, Ukrainian legislation on concessions is outdated and the Ukrainian Government, working closely with the country’s business community, is currently working on amending the legislation to facilitate implementation of port projects based on this type of arrangement.
In particular, it is thought that the amended concession legislation will:
- make it possible for private investors to acquire property subject to the concession for the term of concession and, in particular, use that property as collateral to finance projects;
- simplify the procedure for acquiring rights to the land on which the object of the concession is sited; and
- improve the procedure for determining the amount of concession payments, making it more detailed and transparent, and thus more attractive for investors.
Although the concession legislation needs to be improved further, nevertheless, the Law on Ports goes some way to creating new opportunities for private investors to get involved in seaport projects.
Consequently, a number of local and international players (such as port management companies, shipping companies, terminals operators and agricultural companies) are currently considering the possibility of operating Ukrainian seaports and separate port terminals.
For its part, the Ukrainian Government is actively preparing seaport property for transfer into private hands, on the basis of concession agreements. Given the Government’s promise to introduce more legislation to improve the procedure for granting concessions, it is likely that a significant number of Ukrainian seaports will soon have new private owners.