Nikolay Pavluk's Speech (Chief of Odessa Sea Commercial Port) at the International Port Conference Taken Place in Alexandria, Egypt on 27-29 of January, 2002

(Prepared in co-operation with ANK Law Firm)

The objective of this paper is to consider the ways which make possible the successful cooperation between public and private sectors in the Odessa sea port. I shall consider both economic and to a considerable extent legal aspect of such cooperation. I also guess it would not be useless to provide the audience with some sufficient information on the Odessa port, the port that I have a unique opportunity to manage for the last sixteen years. Therefore first I have to make some historical introduction to the port’s condition within the transport system of the former Soviet Union and present Eastern Europe and the new independent states.

During the former Soviet Union times the Odessa port and its infrastructure was designed to serve the port’s particular role within the transport system of the former Soviet Union and other ‘socialist’ countries, which were connected via various trade economic ties.

The port had at its disposal a guaranteed cargo base with dominance of raw sugar and grain in bulk, their total volume amounted on average to 80% of the volume of all dry cargoes. The both freight flows were bound by transit to all regions of the former country. Thus, only up to 10% of their volume fell to the share of Ukraine. However, since 1990 a stable downward trend occurred in the said freight flows.

It was not surprising since the infrastructure and technical facilities of the port did not comply with the new situation arisen in course of dramatic economic and political changes which followed the collapse of the Soviet Union together with the collapse of the transport ties and relations of that country. As a result, the port’s turnover and revenue dropped rather dramatically.

Thus, after the former Soviet Union’s dissolution the Odessa port as the main port of Ukraine and in all new independent states faced serious problems caused with drop in cargo turnover. Turning our attention to nowadays it seems obvious it would not be an overstatement to say that the Odessa port has find an effective and up-to-date way to solve the said problems.

The situation in other ports of our country was the same, their freight turnover began to decrease rapidly. As a result the port system of Ukraine brought about the events that should took place: the competition for the freight flows of our country arose and became more and more aggravated that caused extremely difficult economic consequences for all Ukrainian ports, and as a result for the national economy as a whole. The comprehension of this threat required the quest for strategically reliable ways-out of the crisis. Of course, such ways ought to be based on the mechanisms of market relations, which gained the foothold in the country in the early 1990s.

To solve the problem the experts of the Odessa port adhered to the position of the competition theory and used the experience of foreign sea ports, that was represented in materials of UNCTAD on problems of port competition.

At the first stage of our researches we made a conclusion that would seem to be paradoxical. The conclusion was of the necessity to refuse from the competition for freight flows with the Ukrainian ports. We found the basis for such conclusion in the competition theory according to which theory it was expedient for our firm to quit the market, if it had not conclusive advantages in struggle with its competitors. There was just the same situation at the market of port services of Ukraine at the end of 1992, when the situation of all ports was emergent and the redistribution of freight flows between them could lead only to one outcome: some ports could consolidate their positions, but only at the expense of worsening situation of other ports.

As a result we faced the need for searching of a new market niche outside Ukraine. Drawing up the project it became evident that the most prospective mean of its implementation under those conditions of the Odessa port could be only business alliance with successful companies having control of large freight flows and intending to use port cargo terminals, where their own stevedore companies could work.

Such cooperation commenced in 1993. Our first partners were three largest metal cargoes traders operating in Ukraine and in the new independent states. As the mechanism became more and more stable and time-tested, the number of stevedoring terminals increased and the terminals themselves became more technologically diversified. Five more companies set up their terminals in the port during the following three years and the number of our partners still increases. As a result, today the port can handle all types of cargoes at the competitive quality and prices. The reason for that is an intersection of economically fruitful scheme of private and public sectors’ cooperation, on the one hand, and favorable legal and regulatory conditions of the joint business, on the other.

Mechanism of cooperation

The business activity of the Odessa port and its partners is governed by the agreements for cooperation (or the “joint activity agreements” as they are termed in Ukrainian law) that is concluded aiming with the purpose to define the competence spheres of the port and a private company, as the agreement’s parties, in their relations, concerning cargoes’ handling, stevedoring facilities’ construction and repair, shares in the joint business and in the profit distribution.

The cooperation agreement enables the port and a private stevedoring company to set up in the port a stevedoring terminal operated by such a company. The company controls the terminal and its operation and at the same time coordinates its activity with the port, which is the state-owned company. Therefore, the private company is impelled to invest money, equipment and intellectual property (technical and management know-how) into the stevedoring facilities operated thereby. The law governing joint activity agreement in Ukraine enables the port and a company as the parties to ensure the stability of their long-term cooperation and the port’s practice reinforces investors’ confidence of such a stability. Hence, being sure of stevedoring process quality and stability the companies are motivated to direct the cargoes, controlled by them, into the Odessa port. So the stable turnover and the increasing throughput for the port as a whole is assured.

In some cases the investment projects regarding stevedoring terminals in the port are more complex and include not only the port, but also some sort of cooperation between the shipping companies on the one hand and the large cargo traders on the other. These companies join their resources to establish and operate the cargo terminal in the Odessa port and, hence, control the whole transport process and reduce their expenditures.

According to the agreement the port grants the infrastructure, and the stevedoring companies implement cargo transfer process and purchase additional technical devices at its own expense. Thus, there is no change of ownership, each party has kept to be the owner of its property that is on its balance.

The port property is transmitted to the stevedoring companies for usage in cooperation for the term when the contract is in force. In many cases the port does not provide an equipment and contributes only the right to use a space and premises of the port and the port’s infrastructure. For some partner companies mere port’s potential was a sufficient incentive to invest in port and construct their own terminals therein. In all cases the port’s contribution to the joint business comprises space in the port, necessary for the construction or the re-construction of the stevedoring terminals, access to the port’s infrastructure (including water, gas, electricity supply et cetera).

The port and stevedoring companies bear expenditures for the development of the port infrastructure that is used in cooperation, restoration and modernization of the port’s assets proportionally to the cost of the assets invested to the cooperation. The port is guaranteed to receive profit of the cooperation that should be not less than the profit received by the port in the quarter preceding to the creation of a company of joint activity, and also profit gains every subsequent year in the amount that correspond to the contribution of venture to joint activity.

The functions of the port and its partners are also clearly determined. The port represents the center that coordinates the activity of all divisions in interaction with the stevedoring companies during the drawing up of port solutions as well as the implementation of these solutions, on the whole this is the port that has the right to make the final decision on the matters in question. The stevedoring companies provide direct operational control on processes of cargo transfer and maintenance of ships.

Legal environment for the cooperation

Let us also examine also the legal and regulatory framework, within which the cooperation of the Odessa port with our private partners develops, for comprehension of such a framework is crucial to understand the nature and the particular features of the mechanism of cooperation between public and private sectors set up in our port.

Saying most commonly, Ukrainian civil and tax law provides rather auspicious regime to that which it calls ‘joint activity agreements’. Under the laws of Ukraine the agreement of such a kind is a basis for creation and operation of different undertakings, enterprises, and businesses without creation of a new legal person. The scheme of cooperation in the Odessa port operates on the basis of such agreements.

In consequence of this the regulatory and tax regime applicable to such an agreements provides the Odessa port with a convenient legal framework for its cooperation with private investors (which are in large foreign investors). The main features and economic incentives of such a cooperation are considered above and the core point of that cooperation is the creation in the port of the stevedoring terminal operated by the private company which in its turn attracts the investments and the cargoes to that terminal (and, as a result, to the port).

Turning back to the legal questions it should be said first that under the civil law of Ukraine, joint activity without creation of a legal entity is carried out on the basis of an agreement, which stipulates joining of funds or assets (including intangible assets) of the parties for achievement of joint economic purpose.

The positive moment of such a joining is that the debts of the parties, including the debts of joint activity, are repaid at the expense of the property of the appropriate party. From the practical standpoint, it means, that in case of compulsory collecting of debts under the obligations of any of the parties, the collection of the debts at the expense of the property used in joint activity, is possible only after allocation in kind of the share of the appropriate party.

The management of joint activity and conducting of joint business of the parties is assigned to one of the participants by mutual agreement of all parties. Such a participant is given an appropriate power of attorney by all other participants.

The matters of distribution of the expenses and losses of the parties, as a rule, are co-ordinated by the parties at their discretion and are fixed in the agreement. However, if these matters are not covered in the agreement at all, joint expenses and losses become covered at the expense of joint property of the parties, and the extra sums are allocated among them proportionally to their contributions. Besides, it is necessary to note that the law does not put the amount of a share of a participant in direct dependence on the amount of his contribution.

The Regime of Foreign Investment Law requires separate bookkeeping and tax reporting under the agreements on joint investment activity. Besides, for settlement of accounts it is necessary to open a separate bank account designated only for joint activity’s revenues and expenses.

The bookkeeping, making and submitting tax reports to tax authorities on operations within the joint activity, managing separate bank account, is assigned to the party, which is responsible for the management of the joint activity. In case of the Odessa port that party is usually a private investor company although the port retains some important powers concerning the general control of the terminal and its business operated by the investor.

The joint activity is registered with the tax authorities as a taxpayer of corporate income tax and VAT. Therefore, the tax accounting for the cooperation is held separately from that ones of the port and of the investor. The joint activity as a registered taxpayer pays all corporate taxes that exist in Ukraine and the profit is shared between the port and the private investor after taxation. It ought to be noted that the joint activity is identical with the corporate body respecting its taxation status. Therefore, this form of doing business in Ukraine provides for a single tier of taxation and there is no double taxation for the profit of the joint activity and of its members (participants). The shares of profit paid by the joint activity to its respective participants are subject to taxation at the corporate income tax rate. But such a taxation is a part of the joint activity profit taxation and as a result the profit of partners to the cooperation is taxable only once. The share of profit, when received by the partner, does not stand for its taxable revenue.

Moreover, latest legislation developments provide for even more convenient tax regime for the companies operating at the territory of special (duty-free) economic area “Porto-Franco”. The area operates on the territory of one of the piers of the Odessa port. Some investment projects built on the basis of the cooperation mechanism described above are already in the process of development in the area. Let us consider in short the advantages of the duty-free area regime: (1) all kinds of business activity can be carried out and there is no limitations regarding the types of investments which can benefit from the tax and customs exemptions; (2) special privileged customs treatment is applicable to ex[port-import operations; (3) special order of taxation is set up for the companies, which enter into the investment agreements with Odessa port, and in accordance with this order the profit obtained by the such a company from the investment project is free of taxation for 3 years, and for the next 3 years the profit is 50% taxation free.

Benefits in the field of public and private spheres’ interaction

Under the cooperation scheme described the state-owned port keeps general control of the port as a compound transport complex. In consequence of this, the state supervision of safety conditions on the one hand and commercial operations regarding stevedoring, storage, are separated. The advantages of state control in safety questions are thus combined with those of private initiative and competition in cargo operations.

The port management is now becoming not commercial but administrative structure operating the public (state) property of the port and implementing the supervision on the safety of shipping industry in port waters.

Thus, the Odessa port is the first one among Ukrainian ports to fulfil the very important resolution of the International Maritime Organization No. 787, according to which a supervisory body of shipping safety and environmental protection can not be the part of a commercial structure.

The management structure of the Odessa port that is now in force corresponds to the international practice of port management in the best way. It allows to combine effectively the administration of government and functioning of ventures of public property and to route the earned resources to the development of the port infrastructure. The administration of the Odessa port is today a port administration, i.e. the governmental body administration that is obliged to control the activity of all companies doing business on its territory according to the Ukrainian legislation.

Privatization perspectives

When the reform processes in Ukraine began, all Ukrainian ports like almost all large companies were state companies. From that time little has changed. The current legislation prohibits the port’s privatization although the idea of changing the legislation to allow such a privatization from time to time occurs.

At the same time the law does not prevent the private investors from creating private ports. But until now few projects have been proposed in the field of private ports’ development. Unfortunately, the investment abilities of the Ukrainian and foreign companies working in Ukraine are far from those sufficient for modern port construction and operation. Therefore, as the matter of fact the major Ukrainian ports are state owned. And this situation is inevitable in contemporary Ukraine. The latest privatization of electricity companies in Ukraine can serve as a striking example for obvious problems arising in course of privatization procedures in Ukraine: low prices paid for the companies sold, lack of strategic development in current privatized companies’ policies. Although the economy of Ukraine is continuing to grow, the recession facing the economies of the most developed countries.

As the main port of Ukraine the Odessa port is sure that we have found the ways in which the Odessa port and port system of Ukraine as a whole can contribute from the private investments and initiative while not undergoing the complex, risky, and, as post-Soviet privatization experience shows, in most cases counter-productive privatization procedures.

Conclusion: results

During the period of cooperation described in this paper the port cargo turnover increased by 1.8 times from 16 million tones to 29 million tones, and the port profit increased by 4.8 times. The port effectiveness figures also improved considerably. The net intensity increased on 27%, and the working efficiency of stevedore workers increased on 19%.

After the crisis of the early 1990s, when the structure of the port was changed and joint activity companies were created instead of cargo handling terminals, the cargo handling capacity is continuously increasing. Cargo handling technology is having been constantly perfectioned, the berths and equipment having been modernized, the spectrum of offered services having been enlarged.

The list of cargoes handled in the port now includes non-ferrous and ferrous metals, equipment, vehicles, chemical fertilizers (packed or in bulk), paper, raw sugar in bulk, cereals (packed or in bulk), citrus fruits, bananas and other cargoes packed in bags, boxes, packages, big-bags, containers. This list is an illustrative only and is subject to steady extension.

As a result the full range of the supplementary services may be offered to the port’s clients, including forwarding; customs broker; staffing and unstaffing containers; international container transportation with trucks; repair of cargo packing; marking cargo; examination cargo; vessel’s supply with water, fuel and lubricants at berths or at roadstead; taking off sewage and garbage; little repairs; guarded parking for container carriers.

The fruitful work of the stevedore companies, the companies of joint activity, allowed us to proceed to the next stage – to the creation of joint activity companies performing auxiliary functions in the port: repair of technical devices (Planmarine Service company), supervision and improvement of ecological and sanitary conditions in the port (Greenport company), radio-telephone communication (TVC-Ukraine), activities of the yacht and hotel complexes etc. Now the port continues this work and steadily diversify the range of the additional services provided to the clients. Our passenger facilities now include the international luxury hotel constructed at the port’s territory in 2001 which is now operated by the well-known Kempinski group international hotels operator.

I believe that the next steps to strengthen the market economy-oriented mechanism of our port management should be find in the solution of problems, related to the achieving of high competitiveness of the port, gaining of strong positions at markets of port services, providing effective use of the potential and modernization of the organization structure of the port management. As I tried to demonstrate, the approaches to the solution of these problems have been already worked up. Therefore, I consider that our task as the port is to adapt these approaches to the daily changing work conditions of the Odessa port taking into account the economic situation in our country and the outlooks of its development

We connect the successful solution of the said problems with the further strengthening of cooperating relations with the present and future partners of the port within the joint activity framework. The main advantage of such a development is the consolidation of the informational, technological, management and financial resources of the port and its partners which in the aggregate makes today some sort of port community. That consolidation can serve the most effective form of the port management in Ukrainian conditions peculiar to the economy in transit and will effectively enhance and stabilize the cargo base of the Odessa port.

The scheme of cooperation described has quite long history, because the Odessa port since 1993 has been a pioneer amongst other Ukrainian ports in employing of its uniquely fashioned scheme of private and public sectors joint functioning. Therefore, analyzing the Odessa port experience, we come to the conclusion of fruitfulness and good perspectives of public and private sector cooperation mechanism set up in the Odessa port.

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