Containers and Concessions (Chernomorsk Port)

It is widely expected that Hutchinson Ports will build/lease/refurbish a number of terminals at Chernomorsk (Illichovsk to older readers) Port as and when it wins a tender in late May/early June.  The company headquartered in Hong Kong already operates 52 high-tech terminals across 26 nations and is one of the world’s biggest freight/cargo handling companies, handling about 13% of the global market.

It is widely expected to win the forthcoming tender because it makes no secret of its desire to have a Black Sea terminal, or of its involvement in the forthcoming tender.

Being Hong Kong based, it is no surprise that facilitating Chinese exports and imports are a major part of the corporate business, with routes to the EU via its major port hubs in Rotterdam (ECT Delta – an almost entirely automated port) and Barcelona (Euromax – a semi automated port).  Naturally if (or in reality when) it wins the Chernomorsk tender, a third major route for Chinese exports/imports will open up for Ukraine and the southern EU States.

Any which way this arrival is shaken, to either semi, or entirely automate their leased berths at Chernomorsk Port will require significant investment, for each individual European Hutchinson run port dwarfs the number of containers handled compared to the entirety handled by Ukraine.

However, the investment plan submitted by Hutchinson does not seek to match that container handling capability in Ukraine – presumably due to the fact there there are only 6 berths for lease.  It is however, projecting a handling turnover that will add approximately 30% to the national port container handling figures (Hutchinson expect to handle 250,000 containers per annum at the Chernomorsk berths.)

The investment plan over the 49 year lease requires $5 – $10 million investment – excluding investment spent upon berthing infrastructure, capacities and equipment in the first 5 years – and a total investment over the 49 year lease of $75 million.

Jolly good.  The white economy of Odessa will undoubtedly benefit.

However a reader should note that both their ECT Delta and Euromax terminals within the EU received concessions – and the current Ukrainian concession legislation is about to change – or not.

The first reading relating to concessions passed through the Verkhovna Rada some time ago.  Since then it has not seen a sniff of appearing upon the Verkhovna Rada voting agenda for the required second reading.

The draft concessions related legislation seeks to energise FDI – in other words it is designed to provide predictable and solid conditions to create PPP (Public-Private Partnerships).  In the simplest of terms, The State attracts foreign investors to upgrade/refurbish/create or restore long ignored, underfunded and otherwise decaying infrastructure in return for lengthy leases and the corporate ability to use the leased objects/property for (presumably significant, otherwise why get involved as a private investor/corporation) commercial gain.  The lease periods are often so long that the incoming investment would have long since depreciated from the balance sheets of any investor prior to their conclusion.

To be fair, it is a European normative.  For example, between 1990 and 2009 when Hutchinson entered Rotterdam and latterly Barcelona, concession led PPP initiatives across the EU totaled approximately Euro 260 Billion.  Ukraine would be very prudent to follow that tried and tested formula.

Wisely the draft legislation relating to concessions has rather a broad scope regarding legal input – and this is perhaps why there is a delay in the second reading.  Input is not confined to a nefarious and/or often ignorant Ukrainian political class (and their associated corporate/business interests).  Input includes entities like the EIB, EBRD, IBRD etc.  No doubt there is the usual friction between transparency and objectivity when selecting those receiving concessions from the “external side” when it comes to this legal input, and exactly the opposite from the domestic political class intent upon retaining their vested interests.

Ergo it should come as no surprise that currently within the draft text, there are few lines demanding any concessionaire operates from a legal entity in Ukraine (unlike now).  A domestic opportunity to “squeeze” if transparency and objectivity wins out.  That said the draft Bill also provides for arbitration and mediation within a jurisdiction of choice – which in the current climate will invariably not be Ukraine.  (Naturally the draft legislation states that any nation identified as an “aggressor” (read Russia), or company thereof, or company with shareholders thereof, are forbidden from receiving concessions.)

Furthermore private companies will also be able to offer concessions.  It will not remain solely within the State remit.  That in effect will remove the requirement for public tenders allowing for direct negotiations between private companies.

There is of course much, much more – and the devil is always found within the detail, however to be blunt most foreign corporations/investors seeking concessions are going to be looking at major infrastructure – roads, rail, airports, shipping ports, recycling plants, energy, and pharma – so there is little reason to bore a reader with the minutiae of the draft text (which may well change before a second reading in the Verkhovna Rada – if that eventually comes).

In the context of this entry, what matters is the timing of the second and final reading of this draft Bill.

Will the absence of the new concessions law have any major impact upon, if not the Hutchinson lease acquisition, then the timing of the actual investment?  What deals have been cut to allow Hutchinson to otherwise ignore a law that would probably be beneficial to it?  If Europe be any guide, having secured concessions in The Netherlands and Spain, Hutchinson will surely be expecting the same in Ukraine.