Annual increase of container flow in Ukrainian ports makes in average 30-40%. It is one of the largest growth indexes among the ports of the world. Such increase is a consequence of favourable conditions related to the development of foreign-trade activity in CIS countries and high level of imported goods in general volume of consumer goods.

The principle problem that restrains the growth of container traffic in Ukraine is capacities deficit of Ukrainian container terminals. In Ukraine there is no single program of port infrastructure development. As the result, for the years of independence since 1991 there has been invested only about 500 mln USD. Market key players have not come to Ukraine yet. Absence of transhipment in Ukraine is the following problem. At the same time Ukraine has the biggest quantity of sea ports – 18, based in the Black Sea and Azov Sea. Another major problem is imperfect legislation for bringing investment into the port sphere. Although our own experience in assisting foreign investors in Ukraine for many years allows implementing some schemes, I must say if the legislation is not going to be changed, giants are not going to come and correspondingly huge investments won’t come too. Some examples of investing the port development in Ukraine exist. Last year EBRD granted a 15 year, €26M loan to the Ukrainian Merchant Seaport of Ilyichevsk (IMTP) to launch its modernisation programme. The port is planning to invest €38.6M to reconstruct its Terminal No 2 (berths 7, 8 and 9), purchase cargo handling equipment (portal cranes, port tractors and semi-trailers), and carry out capital dredging works to deepen the seabed to a depth of 15m. Another example is development of the container terminal of NCC by its subsidiary, Uktranscontainer, in the same port of Ilyichevsk. What is it: first variation or exception to the rule?

Geographical and political opportunities for port development in Ukraine

At the beginning of February 2008 Ukraine joined the World Trade Organization after 15 years of negotiations. They say membership in the WTO would raise Ukraine's gross domestic product and bring in additional billions in foreign investment. On the other hand, the new government program aims at foreign home policy that would make eurointegration possible. Ukraine port development feasibility study funded by European Commission with the financing through Tacis Regional Action Programme 2005 is declared. The objective of the project is to elaborate feasibility study(s) for Ukrainian ports relevant to the Traceca and TEN-T corridors and appraise the proposed measures in more detail in view of their financing by domestic or international banks (including IFIs).

From geographical point of view Ukraine has all opportunities:

• • The Pan-European corridors lead eastward,
• • The integration of eastern European neighbouring countries into the TEN-T transport network has political priority, and therefore is supported by the European financial institutions,
• • There is a particular need to link the national transport network and border crossing infrastructures.

Romania and Bulgaria joined EU in 2007, and Europe must arrange functional cooperation of Black sea ports. Europe for many years has supported the development of Public Private Partnership studies in the sphere of transport infrastructure. Coming from all this, I would say that Ukraine has a great opportunity to benefit from the current political and economic situation in the region. For these purposes only a system approach would allow providing investment.

Public Private Partnership as a strategy

A public private partnership (PPP) is a partnership between the public and private sectors in which risks and benefits are shared. If we go on with the above port of Ilyichevsk as one of the biggest and most modern Ukrainian ports, we can see that in one way or the other the port itself (being a public company 100% owned by the State of Ukraine) has a long experience with PPP. Previously the term of PPP has not been used here as it became modern only recently. We may see here objects of Risoil Group (production and transhipment facilities) and Ilyichevsk Fuel Terminal, both based on some kind of cooperation with the Port as, at least, port and berth dues are taken by the Port. In the area of water of the Port of Ilyichevsk last year there were two container projects announced: one on the territory of the Ilyichevsk Fish Port (with no investor and project capacity of 800,000 TEU) and on the territory of the former Ilyichevsk Ship Repair Yard (supported by APMT and with the capacity of 1,000,000 TEU).

The system of Joint activity agreement (JAA) is working in the port. The port and private operator both contribute their assets without transfer of ownership and without establishing a joint venture. While in general the port contributes by providing the infrastructure and the berth, the private operator contributes by providing equipment, professional experience and cargo volumes. The joint activity is managed either by the port or by the private operator. It is required to keep separate but joint accounts. Taxes are paid from the gross profit calculated in the joint accounts. The net profit after taxation is distributed between the partners. The conditions of carrying out the joint activity are established by a written agreement among its participants. Joint activity is subject to registration with state authorities. The shortcoming is a high level of involvement and mutual inspection of both parties. The joint accounts include costs for both parties and there are frequent discussions on costs included into joint accounts, on matters related to the profit sharing and on some operational matters such as use of equipment, its maintenance and repair, etc. So, the intensive involvement of both parties is often seen as the major inconvenience of the JAA arrangement.

The reason for implementing such an interesting option as JAA is that lease of land and assets (being probably the most transparent PPP approach) are not interesting for the port as a public company. The landowner is either Ministry of Transport and Communications or Municipality, so the lease earnings go into other pockets. The direct lease of the waterfront and the berth, operated by the port, to private parties is excluded by the legislation. Thus, such an arrangement gives an opportunity to make business with servicing the vessels and handling, satisfying both parties. The JAA with Ukrtranscontainer for container handling is an example of a long term PPP with considerable operator’s commitments for investments of 51 million USD.

Meanwhile, the concession, being the most known PPP construction, is almost not used in practice. The reason is lack of governmental support and insufficient protection of investors’ rights. De jure the legal framework exists. The Concessions Act of 1999 provides for an extensive list of spheres of economic activity in which objects of state and municipal property may be constructed, renovated and/or operated under the concession. It includes ports, motorways, airports, etc. The concession agreement is an agreement, in keeping with which the empowered state body or local authorities give to a subject of entrepreneurial activity a right to create the object of concession or to improve it substantially and (or) carry out the exploitation. The concession agreement is made for the agreed period but no less than 10 years and no more than 50 years. The law established a number of substantial conditions of the agreement of concession. The Model concession agreement is ratified by the Cabinet of Ministers of Ukraine.

So, port infrastructure can be given into concession to private operators according to the legislation of Ukraine, but this issue is solved on the level of the Cabinet of Ministers of Ukraine. To go further in this trend the concrete object of the port (a terminal, for example, or the whole port) must be determined by making a special Resolution of the Cabinet of Ministers of Ukraine. Generally speaking, we believe The Concessions Act is not a working one. Concession contracts are widely used in the port sector in other countries today.

There are some other PPP arrangements in Ukrainian ports nowadays but all of them seem even vaguer. The core issue is the lack of transparency and consequently guarantees for investors. If we would recommend the way forward within the current legal framework we would advise to choose between the constructing a new private terminal (port) which is allowed without any restrictions in case of receiving a right for the certain land plot or arranging an individual approach within JAA which is also possible but in practice is not an easy choice first of all because of the influence of the port owner, i.e. Ministry of Transport and Communications. Our opinion is that change of the legislation in the discussed sphere would allow the immediate influx of foreign investment, because investors wish transparency and simplicity, on the one hand, and minimisation of disputes, on the other one. Until that moment Ukraine will be getting investors from among cargoowners which need to service their business today, and not from professional international port operators and shipping lines able to invest huge funds.

The range of issues raised by the structuring and negotiating PPP agreements for emerging markets is as broad and diverse as the projects themselves. For lawyers working on these projects this strengthens the need to be flexible, creative and innovative. There must be solutions found. Precedents and guidance materials can be helpful but cannot be transformed automatically. So, we think that the likelihood is that PPPs will continue to be adopted and refined both in the Black Sea region and Ukraine. And in Ukraine the need for a firm and balanced understanding, what PPP is, is consequently as great as ever.