In the first part of this interview with the former deputy minister of infrastructure, he discussed his attitude to working in state agencies in the near future, the new structure of the Ukrainian Ministry of Infrastructure, the long-standing problems in his industry, and the reasons reforms are moving so slowly.
We decided to continue the conversation by discussing the issue of establishment of a maritime administration.
Let us talk about the maritime administration. Can you explain the functions it will have and why a decision was made to recreate it?
Firstly, a maritime administration exists de jure today and it has always existed. Any country that is involved in international shipping has a maritime administration in one form or another. In Ukraine, the Cabinet of Ministers entrusted the functions of the maritime administration to the Ministry of Infrastructure and the minister is currently its de jure and de facto head. Various separate government agencies performed the functions of the maritime administration in various years. Most of the time, these functions were performed by the State Sea and River Transport Department, which is a government agency with a special status. Then, a separate central agency was created for a short time. It was the agency closest to resembling a maritime administration, but it existed for about six months, after which it was abolished for political reasons, as I understand.
The focus today is establishing the most efficient model for the maritime administration. The best international experience should be taken into account when creating it. It is necessary to invite experts, two or three countries that we emulate and see how it works for these countries: see how much power that the maritime administration has and whether all enterprises in the maritime industry should be subordinated to the maritime administration immediately or whether it should start by handling international obligations and then gradually increasing its functions.
We cannot simply create a separate executive government agency, call it the maritime administration, and say we have resolved the issue. We must do significantly more
I believe that it is necessary to start with international obligations because if the maritime administration is overloaded at the start with all the enterprises in the industry – and there are more than 35 such enterprises today – then it will again go in a direction that is not quite right. Therefore, the issue today is not that we do not have a maritime administration but that it should be operated based on the most efficient model. For many years, commercial, property, and investment issues stood in the foreground in relation to the industry while the international functions, from which the maritime administration should begin, faded into the background. As a result, many enterprises – the so-called conventional enterprises – essentially ceased to exist. We lost our position at the IMO. A lot needs to be done on issues of implementation of the convention.
You said that international experience should serve as an example. The experience of which country specifically?
The operating models of maritime administrations in all developed maritime countries – and not only maritime countries – are almost identical. However, we must understand that this is not a dogma: we cannot just create a separate executive government agency, call it the maritime administration, and say we have resolved the issue. We must do significantly more.
How should the maritime administration be financed?
The way it was financed until 2011 – with proceeds from the administrative fee that the government levies on every vessel that calls at a Ukrainian seaport. Since the abolition of the maritime administration as a separate government agency and the distribution of its functions within the Ministry of Infrastructure, this fee has been going directly into the state budget, which is essentially a violation of international norms.
Therefore, the primary task during creation of the maritime administration is to secure dedicated funding in the form of an administrative fee. This will allow recruitment of people at market wages, who will be good practicians and not just theoreticians.
Regarding reform of the Ukrainian Port Authority, as far as is known, branches are to be consolidated on a regional basis. Will these branches be transformed into separate legal entities?
With regard to transformation into separate legal entities, their operations will be simplified. However, seven out of the 13 branches are self-financing and the others are unprofitable. On what funds will they will continue to exist, not to mention develop? The idea of merging them based on the regional principle was proposed as a result. However, if we merge three branches into one, then it should have positive financial results.
Does that mean that the Mykolaiv branch will be pulling the Kherson branch?
The Kherson branch is not unprofitable. I would say that the Kherson branch will have to pull the Skadovsk branch and the Illichivsk branch will have to pull the Bilhorod-Dnistrovskyi branch. But that was just an idea. Such decisions should be made on the basis of serious economic calculations. The basic principle is to merge, ensure that there are no lossmaking operations, and that there is development.
Seven out of the 13 branches of the Ukrainian Port Authority are self-financing and the others are unprofitable
I know that we have already developed a strategy for development of the maritime complex. Do we need a new development strategy? What should be its main direction?
We have a number of relatively obsolete documents from the period of 2008-2009 and even an earlier period. The Ministry of Infrastructure and the Presidential Institute of Strategic Studies have jointly prepared a draft Maritime Doctrine, which outlines government policy on all modes of water transport. As far as I know, this document is undergoing its final modification in the ministry.
Of course, a strategy is needed. Everything starts with a strategy. What should it be like? This strategy was outlined in our action plan in the form of individual steps. These include development of public-private partnership, creation of a modern strategic infrastructure, attraction of private investment, optimization of regulatory procedures, etc. In other words, compliance with the successful global trends, competitiveness in our region, and promotion of trade.
With regard to sailors, it involves raising the skill levels of Ukrainian sailors on the international labor market and establishing the most effective and transparent procedures for training them. With regard to river transport, it involves infrastructure development, cost reduction, increase of transport volumes, and increase of the number of fleets under Ukrainian and foreign flags. Industry research should be addressed separately. I repeat: these theses existed in practically all the strategies, doctrines, concepts, and programs that have existed over the years. Maybe they need to be updated slightly, but the most important thing is for all government agencies to facilitate their implementation.
There was a plan to dredge River Dnipro last year, but the issue was not resolved. Do we really need to dredge the river or is this just the whim of one market participant?
Currently, it is largely needed by the Nibulon company. This is because the company has a fleet that is unable to utilize its cargo transport capacity fully. However, since Nibulon is one of the main carriers on the river, increasing the capacity utilization of the company’s fleet will have an effect on both the company and the country because it will significantly reduce the number of trucks on roads and generally increase the volume of transportation by river. I am confident that other companies will subsequently begin building the appropriate fleet, which will generally lead to a reduction in the cost of river transport. The dredging project is moving forward – the company has twice invited tenders from contractors recently. Unfortunately, there has been only one bidder, which does not comply with the legislation. I hope that a valid tender will take place in the near future. As far as I know, all the formalities have been completed and the funding is ready.
I am confident that other companies will begin building the appropriate fleets after Nibulon, which will generally lead to a reduction in the cost of river transport
Several grain and oil terminals have opened in ports since the beginning of the year. When do you think we will reach excess port capacity for handling grain and oil?
We are already seeing a slight excess capacity for handling grain and oilseeds. Consequently, transshipment rates have fallen slightly and they are likely to fall even more next year because the relevant projects continue to be implemented. Nevertheless, this is still a highly profitable business and, in my understanding, it will remain highly profitable for at least another five years. It is important for politics not to interfere on the grain export market and for the government to create a level playing field for all exporters. As an example, I am talking about the issue of VAT refunds to agricultural exporters, many of which are known to own transshipment capacities in ports.
How critical to investors are situations similar to the one involving Brooklyn-Kiev or Risoil?
For those investors that have already built facilities, it is definitely negative and reduces the efficiency of a project. However, it has a more negative effect on those that are planning to build. Such things scare them. I am not saying that the regulatory authorities should not enforce the law or that they should close their eyes to something. However, maybe it should be done less publicly when it comes to major investors, who are needed today more than ever.
Payment of 75% of the profits of state enterprises into the state budget: as I understand it, this will have a particularly negative impact on smaller ports such as the Oktiabrsk, for example…
I would not say that such a relationship exists. Enterprises with small profits have development plans that are more modest while those with larger profits have development plans that are more ambitious. This rule makes both plans impossible to implement. Therefore, if it is not canceled – and I have no illusions that it will be cancelled this year – then all existing development plans will be impossible to implement and ports will lose their attractiveness. Now, we all need to make an effort to prevent a recurrence of this situation in 2017 and subsequent years.
Rumor has it that ports will be bankrupted by with the help of this rule with the aim of eventually privatizing them at bargain prices
On the one hand, I think that the emergence of this rule speaks of a serious budget deficit. On the other hand, it once again underlines the government's position in relation to state companies. After all, it affects not only ports or transport companies. It affects everyone in the public sector. The existence of such a rule makes state companies even more uncompetitive in relation to private companies. Therefore, it is necessary to accelerate the commercialization of state companies to enable them to grow and not be dependent on this rule. With regard to the state companies that have strategic assets on their books and are therefore not subject to commercialization, it is necessary to secure significant reduction of the size of the deductions from their profits or completely cancel them. Again, this is the practice in most countries in the European Union.
In continuation of this theme: in your opinion, can certain stevedoring companies remain in state ownership or must they all be privatized?
In my understanding, all economic activities should be effectively managed by private companies. The idea that state stevedoring companies pay huge taxes and that they are better for the government than private stevedoring companies is a myth. Such claims are made by leaders that want to remain longer in their government posts, but they are not guided by national interests. It is wrong to take credit for the "successes" that are down to the devaluation of the national currency. To make the right calculations and compare efficiency, it is necessary to first apply the correct amortization value and exclude the effect of currency fluctuations. Then we will see the real picture. I also advise an analysis of the pace of investment by private stevedoring companies compared with state stevedoring companies. Answer this question: why is it that not a single state elevator has been built in the past 10-15 years while dozens of private elevators have been built? Funds were available, there is access to water, and demand on the market is high. Theoretically, they can build. Why are they not building?
Why is it that not a single state elevator has been built in the past 10-15 years while dozens of private elevators have been built? Funds were available, there is access to water, and demand on the market is high
Two modern terminals built with private investment from the Bunge and Kofko companies were opened at the Mykolaiv port recently. The size of the investments is hundreds of millions of dollars over several years. So, each of these companies invested more than all state stevedoring companies combined during this period! What else are we talking about? In our industry, like everywhere, managements are divided into two categories: one thinks strategically and lays foundations for decades while the other takes advantage of what was created before it but attributes imaginary achievements to itself. Fortunately, the latter are not so many and all their "activities" are clearly visible and understandable.
Recently, a decision was made to extend the 50% discount on transshipment of transit cargoes in ports. How do you assess the effect of this decision?
This decision was imposed in exchange for sanctions and other "courtesies" associated with political relations. Therefore, it continues to fall, unfortunately. According to many customers and market participants, this discount is a deterrent and it needs to be renewed. In addition, it is obvious that this should not be limited to transit goods and that the reduction should also be extended to export and import goods.
Does that mean introduction of discounts on transshipment or a new methodology?
A new methodology and a new tariff book. It is more civilized and, most importantly, it is quite possible to do it before the end of the year.
You worked on a new methodology for calculating port charges. What are its foundations?
Costs plus. A port needs USD 1 million a year to maintain its existing infrastructure. Next, we add an investment component of 15% for development. That is an additional USD 150,000. The total is USD 1.150 million, which is the annual cost. Furthermore, this figure is divided by the number of ship calls to obtain the amount that each vessel should pay as tonnage charge. That is the way it is done at all ports. After that, charges must be modified to make them as similar as possible in all regions to avoid major imbalances. That is a simplistic way of describing it, but it is actually based on a serious document involving a lot of formulas and calculations.
Many people say that we not only have inflated port charges, but also an excessive number of charges…
I agree. It is advisable to reduce the number of charges. However, a clear list of the charges is provided in the law "On Seaports." In order to change the list, we need to amend the law.
Transport laws do not work where politics interferes with transportation
I want to clarify the situation involving transit of goods. Do you think we will someday be able to return to the previous cargo volumes? Do we even need to return? Could we replace this volume with export-import cargoes?
Of course, it is necessary to strive for this. What else should we do: rely on only our own products? Then why do we need such ambitious development plans? Ukraine should take advantage of its geographical location. However, transport laws do not work where politics interferes with transportation. However, let us hope that this is temporary and that Ukraine will be able to fully realize its transit potential, in terms of goods on transit to both the European Union and the post-Soviet area.
What is your forecast for cargo turnover at ports in general?
I think all ports will reach 140 million tons this year. The share of transit has fallen from 40% to 7% in 10 years. Therefore, there is a lot of work to be done...