Commercial sea ports are key elements of Ukraine's transport system, playing an important role in international trade and the country's economic development. Ukraine has ample opportunities for the development of the maritime sector due to its favorable geographical location. Attracting capital - both domestic and foreign - requires, among other things, a clear regulatory framework. It is also important to constantly improve the functioning of the maritime and port administration.
1. Economic data and more1
The port industry plays a significant role in the development of the Ukrainian economy. The total revenue generated by the market of services in the seaports of Ukraine from 2016 until the beginning of the full-scale Russian invasion amounted to at least $1.7 billion per year, which always exceeded 1-2% of the country's GDP during this period.
Commercial seaports of Ukraine are primarily gateways for export products originating from domestic agro-industrial, mining and metallurgical complexes and import all kinds of raw materials, including those widely used in the coal and iron ore industries, as well as imports of containerized cargo, accounting for approximately 40% (including USD 28.5 billion in 2016) of Ukraine's foreign trade volume.
In the continental part of Ukraine, on the Black Sea, Azov Sea and in the Danube Delta, there are 13 commercial seaports: Reni, Izmail, Ust-Dunajsk, Belgorod Dnistrovsky, Chornomorsk, Odessa, Yuzhny, Mykolaiv, Olvia, Kherson, Skladovsk and currently occupied by the occupiers: Berdyansk and Mariupol. Their total throughput is 240 million tons of cargo per year, and the length of the mooring quay is about 43 km.
Currently, the largest ports used by Ukraine are: Yuzhny, Odessa, Mykolaiv and Chornomorsk, which account for about 80% of the total throughput of Ukraine's seaports. Their key advantage is the presence of deep-water approaches that allow for servicing large-tonnage seagoing vessels.
Other Ukrainian seaports can now accept ships with a smaller draft. Cargo handling in these ports is provided mostly by state-owned shipping companies, unlike the four largest ports, where the share of the private sector is already much larger.
According to the results of their activity before the full-scale invasion, the seaports of Ukraine in terms of tons of transshipment took the second place among the countries of the Black Sea and Azov Sea basins. At the same time, in the ranking of seaports of the region, the port of Yuzhny takes the third place, and the ports of Odessa, Mykolaiv and Chornomorsk take the fifth, seventh and eighth places, respectively. The presence of deep-water approaches up to 21 meters deep (19 m near the quays) in the seaport of Yuzhny provides it with a leading position in the ranking and the ability to service Capesize vessels. The fact that transshipment activities in these four largest ports are already carried out primarily by non-state enterprises, additionally has a positive effect on the further dynamics of their development.
2. Competitive advantages
Currently, the obvious risks to investments in the port sector are related to the ongoing war operations, which, however, does not deter investors, including the main global players in the maritime transport industry.
The undoubted advantages of the Ukrainian port industry in the Black Sea-Azov basin are:
- the advantageous geographical location of sea ports at the crossroads of international transport corridors, enabling transit cargo flows to and from Europe, Asia and the Middle East;
- the relatively small distance of these sea ports from the centers of consumption and production of exported Ukrainian goods and the formation of bulk cargo;
- availability of free land near the ports, constituting a reserve for their future development;
- availability of deep-water approaches and sufficient capacity for handling and storing a wide range of goods for export, import, transit and cabotage;
- the presence of transport hubs in sea ports ensuring the technical possibilities of transshipment from/to all types of transport – pipeline, rail, road, river;
- the high potential of sea ports for transshipment of ferrous metals, coal, iron ore concentrates, as well as grain, which are currently the main items of Ukraine’s foreign trade, associated with the existence of the above-mentioned transport hubs;
- direct rail connections with neighbouring countries;
- possibility of transshipment for river transport of goods from/to European Union countries with ports on the Danube;
- the existence of a legal regulatory framework that encourages a steady increase in the share of private investment in the port area;
- large availability of specialists, including qualified workers in the port and shipbuilding industries, which have been developing here for decades.
A lot of detailed, practical information and data is included in the published Draft Strategy for the Development of Sea Ports of Ukraine for the period until 2038, the link to which is provided below this text.
3. Legal framework
The main legal act regulating the activities of sea ports and defining the principles of investment in port infrastructure is the Law of Ukraine of May 17, 2012 No. 4709-VI, On Sea Ports of Ukraine. It regulates the port management procedure, the division of competences between the port administration and other state bodies operating on its territory, as well as the basic relations with private operators.
The activity of the latter in the port area is developed primarily on the basis of several legal structures. Due to the strategic importance of seaports for the national economy of Ukraine, opening up to a greater participation of private operators in their operation is usually associated not only with imposing certain monetary benefits on them, but also with obliging them to carry out certain investments in the terminal area. The implementation of the latter goal is primarily served by concessions and public-private partnerships (PPP), and to a lesser extent lease agreements. Strategic considerations dictate that private operators are permitted to operate only individual terminals.
An important tool in developing port infrastructure is the Law of Ukraine of October 3, 2019, No. 155-IX, On Concessions. It allows for the granting of rights to private companies to build and manage port facilities. Concession agreements are often used in the implementation of large infrastructure projects requiring significant investments, in particular the modernization or construction of new terminals and port facilities. A concession is a more complex instrument and is intended for a longer period of validity than a lease. The fact that the concessionaire not only uses the real estate and infrastructure of the plant in return for payment of rent, as is also the case with a lease agreement, but at the same time is imposed on him various investment obligations, obliging him to modernize or expand the facilities, makes the concession the instrument most willingly used by public entities in the operation of such infrastructure as port terminals.
When it comes to handing over real estate belonging to public entities in lease, legal relations in this case are regulated by the Civil Code and the Economic Code of Ukraine and the Law on the Lease of State and Municipal Property. As mentioned above, the scope of the lessee's obligations is relatively narrow by design, and the term of the contract is shorter than in the case of a concession.
From the perspective of the Ukrainian state, the concession is of course a more advantageous option than privatization enterprises existing in ports. In the case of concessions, the State retains ownership of the real estate and at least part of the infrastructure (previous privatization processes in this sector have not been successful).
The Act on PPP defines the legal basis for cooperation between the state and private investors, regulates the terms of concession agreements and granting investors the right to operate infrastructure facilities. We have already written about PPP, which is becoming an increasingly popular mechanism for attracting private capital for large investments, including in port infrastructure:
Customs and tax regulations (especially the Ukrainian Customs Code and the Ukrainian Tax Code) also affect the final balance of investment for entities that engage in the use and development of port infrastructure. The current regulations provide, among other things, for the possibility of obtaining tax preferences for companies implementing investment projects in ports, as well as simplification of customs procedures for the import of equipment and materials necessary for the construction and modernization of port infrastructure facilities.
The legal environment important for port operators also includes regulations and orders of the Minister of Infrastructure of Ukraine. It is this office that is responsible for developing and implementing the strategy for the development of port infrastructure, as well as for the proper regulation of investment processes in this area. The Minister of Infrastructure also supervises the implementation of investment projects in individual ports, coordinating cooperation with private investors.
A well-developed and clear legal regulation regarding investment in port infrastructure in Ukraine is one of the most important factors conditioning the inflow of foreign capital. It seems that the Ukrainian authorities see these needs, especially since, despite the war, Ukrainian ports are working very efficiently.
authors:
Michał Wojtyczek – attorney-at-law, head of the Ukrainian Desk department
Svitlana Nemertsalova – lawyer in Ukraine
1Data sources:
- State Agency for Infrastructure Renewal and Development of Ukraine:
https://restoration.gov.ua/press/news/55759.html;
- Draft Strategy for the Development of Sea Ports of Ukraine for the period until 2038:
This entry contains general information on the issues discussed. It does not constitute legal advice or a solution to a specific case or legal problem. Due to the unique nature of each factual situation and the variability of the legal status, we recommend that you seek the assistance of a law firm for legal advice.