Why Vessel Calls at Ukrainian Ports are the Most Expensive in the World

Ukrainian ports are losing the competition on the world market - their services are four times more expensive than the services of Chinese and Brazilian ports and even the services of the Romanian port of Constanta. What can be done not to scare but attract cargoes?
Andrey Lopakhin 21 March 2016 17:17

"The cost of a vessel call at the Yuzhny port is 4.2 times higher than the average cost for Black Sea ports and 4.5 times higher than the cost at competing ports (Hay Point, Vancouver, and Tubarão). Ukraine has the largest number of fees (seven) among competing ports. For comparison, Tubarão (Brazil), which is a competitor of Ukrainian ports in terms of export of iron ore, has only two types of charges," said Andrei Isayev, a consultant with CFTS Consulting.

The cost of a call at the Yuzhny port for a Capesize ship is USD 430,000, with charges totaling USD 326,000. For comparison, the costs of vessel calls are USD 123,000 at the Novorossiysk port, USD 112,000 at the port of Constanta, and USD 64,500 at the Turkish port of Erdemir.

The charges include fees for the use of port facilities, port waters, etc., and revenues from them are used to finance maintenance and development of the port’s water infrastructure. In Ukraine administrative, canal, ship, light, berth, sanitary, mooring, and anchor dues are charged. Vessels are charged fees mainly for specific services provided. The fees are determined both quantitatively and qualitatively and revenues from them are used to cover the costs of provision of these services. The number of services can reach 20 – from customs and veterinary inspection of, unreasonably expensive tugs to communication services.

Why so expensive?

Port charges have never been low in Ukraine's history. Since their legislative approval at the dawn of independence until now, port charges have been raised only twice. Port charges were first raised in 2003, when they went up by an average of 7%. The most significant increase was in 2007, when they went up by 58%.

"We are facing the consequences of this decision today,” a representative of the Metinvest Holding told the CFTS portal. "In the US dollar equivalent, port charges in Ukraine are USD 1.1-3.0 per ton of cargo higher than the port charges at comparable foreign ports. Essentially, the rates are 98-370% higher than the rates in ports of China, Brazil, Australia, the Netherlands, and even Russia."

Thus, a call at a Ukrainian port by a vessel of the Capesize class costs more than USD 430,000 while a call at a port in China or Brazil, for example, costs about USD 110,000. To a significant degree, this is because the rates of the key dues (ship, canal, and mooring dues) are 2-3 times higher in Ukraine.

At the same time, it is important to understand that 95% of the fees in Ukraine are regulated and collected exclusively by the state and the Ukrainian Port Authority, which is a state monopoly, as stipulated in the relevant regulations.

Since the state monopoly levies the charges in US dollars, the fall of the hryvnia has led to a sharp increase of the monopoly’s revenues while Ukrainian exporters’ competitiveness on foreign markets has reduced (due to the collapse of world prices).

"Prohibitive charges during a global crisis are leading to a reduction in cargo flows. Ukrainian ports are losing their transit potential, among other things. In the end, businesses are losing profits, the state is losing budget revenues, and many of the country’s citizens are facing the risk of remaining without jobs," Metinvest said.

The Ukrainian Port Authority explained that port charges are the only source of funding for maintenance, repair, reconstruction, and construction of the state portion of port facilities.

"Even the management of the Ukrainian Port Authority now agrees that flexibility in the tariff policy of ports is necessary"

"This is the significant difference between the operations of the Ukrainian system of seaports and the operations of seaports in most countries in the European Union, Asia, and the United States, which, in addition to targeted fees, receive substantial funds from central and local government budgets as compensation for maintenance and development of shipping facilities," the Ukrainian Port Authority said.

In many ports, port charges are determined based on the so-called French concept, which regards ports as part of a single national transport system tasked with meeting the country's needs for transportation of goods. The French concept provides for using port charges to cover only part of a port’s costs. Money from the state (local) budget, i.e. taxpayer funds, is used to compensate for shortage of funds. Funding from the state is seen as a prerequisite for the operation and development of ports.

"In the European Union, there are subsidies for infrastructure development but we do not receive anything from the state. On the contrary, we pay taxes on our revenue from port charges. Only 10% of our profits are left for financing development," the Ukrainian Port Authority’s head Andrii Amelin said.

Flexibility in priority

However, even the management of the Ukrainian Port Authority now agrees that flexibility in the tariff policy of ports is necessary. "The situation on international markets is very unstable – a big rise today, a fall tomorrow – and we must react to this promptly. This applies not only to port charges, but also to stevedoring operations, because reduction of port charges alone does not yield the desired effect,” Amelin said at a press conference in Odesa on 3 March.

At present, the business community is actively discussing the Methodology for Calculating Port Charges, which was prepared by the Ukrainian Navy’s Scientific Research and Design Institute (posted on the website of the Ministry of Infrastructure in June 2015). Currently, there are more questions than answers. "A reasoned dialogue between business and government and establishment of a commission to perform a serious comparative analysis of port charges in Ukraine and around the world, backed up by the findings of the influential international agency, if necessary, are required in the first stage,” Metinvest said. “More profound and fundamental work lies ahead in the second stage. It is necessary to combine port charges (to reduce the number) and create a new methodology for calculating the charges.”

Meanwhile, shippers’ complaints against the Ukrainian Port Authority are accumulating and a draft law on corporatization and breakup of the Ukrainian Port Authority has even been registered in the parliament.

The owner of the Risoil company (which operates a terminal at the Yuzhny port), Shota Khajishvili, said in a commentary to the CFTS portal that the Law on Seaports turned out to be raw. "The reform was implemented fully. It does not make sense that 1,500 are working for the Ukrainian Port Authority in every port. It does not make sense that a port authority cannot spend the money it earns on its own development. It does not make sense that 75 percent of the money is taken from it. It does not make sense that financial plans are approved when the year is already ending. It does not make sense that we have frozen this system instead of lowering charges and increasing the number of ship calls. Handouts in the form of discounts on transit cargo are a mockery. Where is the source of transit in a country in which a war is going on?" Khajishvili said.

The Portinvest company proposes decentralization of revenues and expenditures from port charges. For example, it proposes that branches of port authorities should invest 90% of the port charges they collect in development, reconstruction, and maintenance of hydraulic structures in their water areas and transfer 10% into the budgets of the local communities. For example, such a procedure is stipulated in the Latvian law on seaports. "It is necessary to create a public mandatory reporting system for accumulation and disbursement of revenues from port charges," Portinvest said. 

"Certainly, a reasoned dialogue between business and government and establishment of a commission to perform a serious comparative analysis of port charges in Ukraine and around the world, backed up by the findings of the influential international agency if necessary, are required in the first stage. In the second stage, more profound and fundamental work lies ahead. It is necessary to combine port charges (reduce their number), create a new methodology for calculating the charges, decentralize financial flows from port charges (for example, local port authorities should accumulate up to 90% of the funds), and create a transparent system for distribution, accumulation, and spending of revenues from charges," Metinvest said.

In the meantime, the Ukrainian Port Authority nods to the Ministry of Infrastructure. "Solution of this problem is the prerogative of the relevant ministry. After approval of the Methodology for Calculating Port Charges, the Infrastructure Ministry should draft the Procedure for Applying the Rates of Port Charges, as well as a draft procedure for calculating the rates of port charges. At the same time, the balance between the government policy on various modes of transport and the business environment should be preserved," the Ukrainian Port Authority said.

"Recently, the government granted a 50% discount on transshipment of transit cargoes in Ukrainian ports. If this practice is extended to the most expensive charges – ship, channel, and pilot fees – for other types of cargoes, it will increase the competitiveness of Ukrainian exporters on the international markets steel, iron ore, and grain, reduce the domestic prices of the products of importers, and generate additional cargo traffic in ports," said Isayev.