The authorities and members of the port community are currently considering ways of bringing Ukraine’s legal framework in the sector closer to the European legal framework and, most importantly, stimulating participation of local self-governments in development of seaports. The most effective form of stimulation is financial stimulation.
The idea is not new to the largest ports in Europe. Firstly, links between ports and municipalities exist primarily at the level of share capital - in Rotterdam, Hamburg, and several other major port cities, municipalities own major stakes in companies engaging in strategic management of port land and assets. Secondly, port authorities are legally obliged to pay part of the money generated from port charges into municipal budgets. Such a scheme is operated in Baltic ports, and this is specifically what is being proposed for use as the basis in Ukraine: "Based on the experience of the Baltic States, deductions can be 10%, for example,” the Portinvest holding’s General Director Oleksandr Smirnov said. “On the one hand, it will motivate municipal authorities to participate in development of ports. On the other hand, it will strengthen public control over the operations of the ASU (the Administration of Seaports of Ukraine) and targeted use of port charges for development of municipal social infrastructure."
Mayor’s offices demanding cooperation The attitudes of the local authorities in port cities to this idea are generally positive. They are primarily interested not so much in the participation of mayor’s offices in development of ports as in participation of seaports in development of municipal infrastructure. However, development will be mutual if this idea works, and mutual development is the essence of the idea.
"I believe that participation seaports in development of urban infrastructure and transfer of part of port charges into municipal budget can solve the problems of a city to some extent, which would make it more comfortable for living and doing business," Nikolayev’s Deputy Mayor Yurii Andrienko told the Center for Transport Strategies (CFTS). Aliona Bahriantseva, the deputy head of the department of financial management at the Yuzhny city council, agrees with him: "Our main task as the authorities is to generate funds into the budget. Therefore, we welcome such an idea and we will support it if it is proposed at the legislative level." However, officials at the Odessa mayor’s office made it clear that they would not say anything negative about this idea, but they did not detail their position on it. This is possibly because the issue of cooperation between the city and the port in South Palmira, unlike many other port cities, has long had political overtones.
The idea of transferring part of port charges into the city budget, which Ukrainian private stevedoring companies have tabled for public discussion, is fully endorsed in Izmail. There, they are proposing spending this money on exercise of the city community’s powers. "The budget of Izmail had received UAH 14 million from the Izmail Commercial Seaport and UAH 1.2 million from the local branch of the ASU as of January 1, 2014. The total amount of revenues from the ports in Izmail constitutes 16.4% of the total revenues that we generated into the city budget," Izmail’s Mayor Abramchenko said in a letter to the CFTS portal.
However, there are opposite views of the situation in Ilyichevsk, where the financial future of the port is linked only to port charges and not to emergence of new stevedoring projects and development of city and port infrastructure. “Today, redistribution of funds between the ASU and port authorities should be discussed,” said Ilyichevsk’s First Deputy Mayor Serhii Bychenko. "After all, the place where a ship calls does not receive anything. Therefore, we will not insist on realization of the initiative on transferring part of port charges into municipal budgets. We are interested not in ‘ripping off’ enterprises more, but in the port operating successfully and port workers earning good salaries. That is when our budget will be filled.”
1.5 or 30 percent? Currently, ports generate payments into local budgets primarily through two channels: the income tax on the salaries of port workers and payment for land by businesses. These are the main items of deductions, and this has been confirmed in almost all port cities. It is another thing that the amounts of payments are calculated based on an approved formula and vary depending on the scale of a port and not the needs of the local budget. Therefore, the sizes of port contributions are very different in different cities. For example, it is about UAH 41 million per year in Yuzhny, which, according to Bahriantseva, constitutes about 30% of the city budget. In Odessa, according to the city council’s information department, taxes and fees into the local budget from the Odessa Commercial Seaport amounted to UAH 34 million in 2012 and UAH 25 million in 2013, which constitute 1.5% and 1.1% of Odessa’s total budget revenues, respectively.
There is a significant difference between 1.5% and 30%, and this “imbalance” can be corrected through realization of the idea of participation of ports in generation of revenues into local budgets. Experts with the ANK law firm also consider these measures appropriate, but they believe that it is necessary to amend the existing legislation. "According to the Law on Seaports of Ukraine and the Ukrainian Ministry of Infrastructure’s order ‘On Port Charges,’ most of them are paid to the ASU, apart from the light dues, which are paid to the State Hydrography Service (Gosgidrografiya). Under such conditions, local budgets do not receive any financial benefit from ship calls at ports and they are therefore not interested in successful development of ports. Consequently, they do not participate in the cooperation process aimed at achieving such development," said ANK’s Board Chairman Oleksandr Kifak. As an option, the legislation in many developed European countries provides for transfer of part of port charges into local budgets (for example, in Latvia, Denmark, and a number of ports in Portugal and Germany), and Ukraine can borrow from this experience.
The legislation in many developed European countries provides for transfer of part of port charges into local budgets
A closer look at this experience shows that the authorities in Latvia, for example, approved this practice at the legislative level in the fall of 2013. According to the amendments to the Law on Ports, the authorities at the Freeport of Riga, the Free Port of Ventspils, and the Liepaja Special Economic Zone are obliged to transfer payments for the use of strategic infrastructure into the budget. The amount of payments transferred into the state budget, just like the amounts of payments into the special budget of local self-governments, constitutes 10% of the tonnage and canal dues, as well as the charges levied on small vessels and anchor dues. "Ports are treated as state and municipal companies, the aim of which is efficient management of assets and increased returns, for example, in the form of dividends. Therefore, port authorities should generate this return into the 2014 budget,” the Latvian Ministry of Economy said in a commentary.
Whether or not the Baltic experience will catch on in Ukraine is an issue for the Parliamentary Committee on Transport and Communications and, ultimately, the entire parliament. However, the success and effectiveness of cooperation between ports and municipalities will depend significantly on the involvement of the two sides: Rotterdam and Ventspils learned this a long time ago and they are using it successfully. Specifically, the municipalities there are the main lobbyists for development of ports because they understand that the city wins when the port wins. Odessa, Ilyichevsk, Yuzhny, or Nikolayev will only have to determine the prospects for this “team game."