Raivis Veckagans: 90% of the cargo is based in Ukraine’s economy

If you look at the entire list of facilities under USPA’s management, which would you say gives a marine nation like Ukraine reason to be proud?

Our job involves constant ‘stock-taking’, constant improvement and development. This comes as no surprise, as we are responsible for maintaining and developing strategic infrastructure in Ukraine’s 13 ports: port waters, 263 quays with a total length of over 40 kilometers, and 120 vessels: pilot boats, a specialized fleet, an icebreaker.

Most of the port infrastructure was built in Soviet times. Naturally, modernization and reconstruction are a constantly important issue. In the last few years, we’ve increased capital investment in this area by 150-200%. In 2015, UAH 650 million was invested. That went up to UAH 1.6bn in 2017 and this year we hope to hit over UAH 2bn.

How upgraded are Ukraine’s port facilities for the purpose of Ukrainian exporters?

On the one hand, Ukrainian ports are not used up to 100% capacity, and the reserve margin is quite sufficient at the moment. At the same time by far not all of them use modern equipment and provide the best speed, volume and cost of reshipment. This applies to state stevedoring companies in the first place, who are, in many cases, losing out to their private counterparts

The USPA is focused on creating the necessary conditions to allow stevedores and cargo owners to enjoy competitive advantages in Ukrainian ports and develop their businesses with the use of marine transport. With this in mind, port service fees were lowered by 20% at the beginning of 2018. The “Yuzhnyi” and “Chornomorsk” ports have seen major dredging projects allowing to reduce the cost of export.

What can be done so that the government doesn’t always lose to private initiatives? How can uneven development be avoided and an equal playing field ensured, regardless of the owner?

The management of state stevedoring companies is pretty bureaucratic. It needs more flexibility compared to the management authorities of private stevedores. And so, in the last five years, the share of state stevedores in transshipment has gone down 17% and is now only 24%. That’s why we support the Infrastructure Ministry’s proposal to set up a public-private partnership for implementing projects. We have already selected two pilot projects: Kherson Port and Olvia Port.

What’s special about these two ports?

First of all, of all 13 ports, their loading capacity is nearly 2.5mn tonnes, which is average. Secondly, feasibility studies confirmed that these two projects are ready to go. And thirdly, there are often complicated relations between port administrations, state stevedores and private ones. Neither of these two port has any of that. Finally, both Kherson and Olvia have maintained a single operating facility: platforms, rail and access to berths. This could be very interesting for an investor.

How does USPA persuade foreign investors to come to Ukraine’s ports on a concession basis?

The infrastructure of our ports makes it possible to transship nearly 250 mn tonnes of cargo a year. Last year, we handled 133 mn t. Moreover only 10% of handling is transit, that is, the volume of cargo tied to possible geopolitical issues, where political or sanctions decisions might influence business. Most of the cargo we handle, 90%, is based in Ukraine’s economy, and this is what we propose to international investors: more than 100 mn tonnes of farm products, metals, ores, and containers were, are and will continue to be processed at Ukraine’s ports.

Ports provide the shipment of over 40% of Ukraine’s international cargo loads. Additionally, Ukraine’s favourable geographic position and transit potential remain to be fulfilled.

How much interest do you see that is backed by capital?

On September 19, USPA and our consultants from concessional project – the IMF and EBRD – jointly presented the feasibility studies of the two pilot projects. In attendance were 24 companies: grain traders and cargo owners, companies from Qatar, Turkey and the UK. They see Ukraine as a market and are looking at their options for investing in Ukraine’s ports.

What criteria do you use to select foreign investors? Under what circumstances would you reject a company?

We would reject anything from Russia. This is the state’s position, and in light of the recent well-known events, I think noone is going to be surprised about it. As to other countries, the main criteria are to guarantee a minimum amount of investment and cargo turnover, provide social guarantees, and pay the concession fee. Beyond that, tenders should determine who comes with the best proposal. International and state companies are on an equal footing here. Consortia creation is also welcomed.

How might the state and private business reach some kind of synergy in developing port infrastructure?

In the last decade, the ports have seen plenty of investment. Investors direct their money towards developing terminals, while the state, represented by the USPA, provides that the piers meet the required technical specifications and the depth of the water zone is sufficient.

For instance, we are now building a grain terminal in the Port of Mariupol. Mariupol Marine Trading Port, a state-owned stevedoring company, is building a terminal for transshipment capable of handling up to 2.5mn tonnes. We’re also reconstructing the pier. In Odesa, we’re working with Germany’s HHLA to build a container terminal: our part is deepening the channel and building the cutwater. With MVCargo, which is partly owned by Cargill, we’re jointly carrying out a huge investment to build a grain terminal in the Pivdenniy port. These are projects we can be proud of and they will be a benchmark for future ventures.

Altogether, USPA has signed memoranda of intent worth a total of US $30bn with private sector businesses. Some of these plans go up to 2038.

How much has USPA been able to do to ensure the security of shipping, for instance, in relation to the hold-ups in the Azov Sea? What kind of threat does further aggression from Russia pose for Ukraine’s shipping activities?

The geopolitical situation in the region is making it hard to expand cargo shipment. On the contrary, in Mariupol, we’ve seen a 10% decline compared to 2017, while in Berdiansk shipments are down 30%. Calculating the ultimate losses is impossible, however, because the economic impact goes well beyond the ports.

The Russian Federation’s holding of shipping vessels coming through the Kerch-Yenikal Canal is illegal and it represents time lost for both ship and cargo owners. And lost time means lost money.

It’s also important to understand that with the building of the Kerch Bridge, additional restrictions have been put in place in terms of sailing under it. Our clients have begun to use smaller vessels in order to be able to navigate under this bridge. Of course, the smaller the ship, the more costly it is to ship a tonne of cargo. The fact that the situation is also uncontrolled and unpredictable means that clients are redirecting their cargo to other ports to reduce their risks.

Right how it’s hard to say that the situation is stabilizing. The Azov ports were designed for larger tonnage shipping and it’s more convenient for exporters to work with large vessels. And so we can see that some of the cargo flow from this region is being handled in Mykolayiv or Odesa.

Despite the temporary difficulties, the Azov Sea ports continue to play an important role for business development in the East of Ukraine and we will continue to develop them in order to strengthen Ukraine's competitiveness on Azov.

Are you saying Ukraine has lost the option to do large-scale shipping in the Azov?

Unfortunately, we have to recognize that the Kerch Bridge makes it impossible to operate a large-tonnage fleet in the Azov. This is reducing the competitive edge of those of our clients working in these ports. For instance, Berdiansk handles enormous amounts of grain. Grain shipped in smaller vessels goes to the Mediterranean, Europe and North Africa. But China, the US and other very distant destinations are no longer competitive.

What about Ukraine as a transport hub at the regional level, if not globally? How ready are Ukraine’s ports to handle a growing transit role in today?

We should take advantage of our location to ship to Georgia, Turkey and Iran. We can compete with Baltic ports and propose that Belarus export to China through the Black Sea. Going further, we can develop a Maritime SilkRoad through the Bosphorus and Suez Canal. We’re in the process of developing a strategy for attracting cargo from Asia following this route.

But we also need to understand that this is a serious competition. Many countries, including the Baltics, Belarus, Turkey, and Egypt want to be in the race as well and get their share of the cargo pie. We need to lobby our interests, promote our capacities, and offer infrastructure projects. And we need to appeal to Chinese partners – as partners, as a state and as a market.