Source: CENTER FOR TRANSPORT STRATEGIES

The inadequate development of Ukraine’s transport infrastructure will be a key limiting factor in the growth of Ukraine’s exports and its economy as a whole in the coming years. A lot of investment and innovation are required in order to start moving forward. This can be done only if the transport sector is opened to private investment, according to the participants in the first Ukrainian Transport Infrastructure Forum, which took place in Kyiv from October 15 to 16.

According to forecasts, global GDP and the growth of world trade are expected to double by 2030. The transport system is not ready for this. In its current state, it will not sustain even a 50% increase in the load, talk less of a doubling of the load. Ukraine is not an exception. "For our country, the priority should be to increase the capacity of transport services, as well as to improve their quality. Indeed, a steady increase of traffic is projected in the key sectors of agriculture, mining, and metallurgy, which generate export revenues," said Serhii Vovk, the director of the Center for Transport Strategies.

One hundred days of port reform Supplies through seaports (including transit) account for 70% of Ukraine’s foreign-trade turnover. Ukraine ranks fourth in terms of cargo transportation to the Eurasian continent, behind only China, Russia, and India, and seven transport corridors pass through the country’s territory. The potential volume of cargo traffic for overland Eurasian transport corridors is estimated at 250-300 million tons per year, compared with the current 45-50 million tons per year.

In the past two years, Ukraine has been trying to reform its port industry, as well as its railway facilities. Otherwise, the rosy growth forecasts for global traffic will bypass us. According to Deputy Minister of Infrastructure Dmytro Demydovych, the ideology of the reform is to establish a public-private partnership and create conditions that will attract private capital, for which infrastructure is badly needed.

Private businesses have already begun to respond to this approach by Ukrainian officials. Statistics show that the ratio of cargo turnover between public and private terminals has been 70% to 30% in recent years. However, this ratio began to change last year. "The Law on Seaports was adopted last year, the Administration pf Seaports of Ukraine was created this year, and ports have been transformed into state stevedoring companies. The statistics for cargo turnover already looks different. All private stevedoring companies in the first nine months of this year transshipped nearly 65 million tons or 61% of the total volume of transshipment of foreign-trade goods," said Oleksandr Smyrnov, the general director of the Portinvest holding.

What are the plans of private stevedoring companies? "The total amount of investments in the stevedoring industry declared by private stevedoring companies is about UAH 15 billion. This investment will allow creation of 70 million tons of new port capacities," said Smyrnov.

Will private companies themselves be able to implement their projects successfully? Portinvest believes that this will most likely not succeed without cooperation with the government. The terminal itself cannot develop and function effectively without interaction with infrastructural facilities controlled by the government.

Yurii Hubankov, the managing director of the largest private port operator in Ukraine, Brooklyn-Kiev, believes that further successful development of the reform requires amendments to the Land Code, the law on private enterprise, and the law on foreign investment. "If you take all the 11 laws that need to change, provisions that are simply mutually exclusive are very common. It is necessary to bring all these laws to a common standard. Yes, this is not an obstacle during conclusion of a concession agreement, but it is a very good reason for regulatory and inspection authorities to begin some processes that scare off potential investors. The processing of land takes 3-4 years even where it is allowed,” said Hubankov.

"The state is not the most efficient owner. It should own a big official stamp and nothing more. The first step toward this is development of a public-private partnership,” said Andrii Stavnytser, the owner of the TIS company, which is the largest private port operator in Ukraine. According to Stavnytser, the following advantages could already be seen in the first 100 days after the start of port reform: tariffs were liberalized, a port ceased to be both a regulator and a competitor following the creation of the Administration of Seaports of Ukraine, the creation of port councils resulted in the birth of master plans for ports, and an opportunity to create private pilotage and towing companies emerged. "Now, it is necessary to establish a mechanism for registering berths and piers as real estate," said Stavnytser.

However, the most important thing that the TIS company is stressing is that the success of the reform of seaports is possible only in sync with reform of the railways. Stavnytser believes that investors are already willing to invest in private locomotive companies.

The train is late The reform of the State Railway Administration (Ukrzaliznytsia) is much slower than the reform of the port industry. In fact, the reform has stalled and remains far behind schedule. That notwithstanding, according to Oleksandr Kava, the coordinator of the Coordinating Center for Implementation of Economic Reforms under the President of Ukraine, a legal framework for reform of the railways has already been created: the “Law of Ukraine on the Particulars of Creation of Joint-Stock Railway Companies of Public Importance” has been adopted; a pilot project for creation of the first suburban transport company has been launched; a program for railway reform has been adopted; the draft law "On Railway Transport" has been prepared.

According to Kava, the key priorities for 2014 include creation of a national commission for state regulation of transport, upgrade of the rolling stock, establishment of a joint-stock company on the basis of Ukrzaliznytsia, separation of activities, and registration of financial results by type of operations.

"Freight operators, freight owners, and the railroad cannot exist separately. This process will be sufficiently efficient and productive only if there is close cooperation,” said Volodymyr Mezentsev, the general director of the Lemtrans company, which is the largest private railway operator in Ukraine.

Lemtrans’ share of the market of gondola cars is the largest among private operators — the company has a fleet of more than 15,000 gondola cars, which account for 16.5% of the entire Ukrainian fleet. Lemtrans estimates its share of the combined fleet of private operators at 39%. The share of private operators has been increasing since 2007: from 32% in 2007 to 50% this year.

Mezentsev believes that the intermediate results have been mixed, considering the experience of Russia: on the one hand, significant investments have been made in the industry, allowing quick upgrade of the rolling stock; on the other hand, the indicators of the operations of rolling stock have fallen significantly.

"Ukraine can avoid these problems by creating the primary conditions for attracting investment into the sector and consolidating the market. Thus, our current task is to improve the efficiency of the use of the rolling stock. The solution will be to create conditions for consolidation of the market and attraction of private investment into the industry. An area for implementation of concession projects could be to grant long-term leases or concession on railway accesses to industrial enterprises,” said the head of Lemtrans.

Where will the money come from? The answer to the questions about what should be built and how should the transport infrastructure be developed to achieve the set goals is clear, but the answer to the question about how to finance all this is much more difficult. Investment in port infrastructure amounted to UAH 1.7 billion in 2012. The distribution of these funds looks like this: 40% went to restoration of equipment for stevedoring operators and 60% to hydraulic structures and other port infrastructure. In total, according to Deputy Minister of Infrastructure Dmytro Demydovych, ports need investment totaling UAH 25 billion. How can one ensure that private investors spend this money in the needed areas?

Morgan Stanley Ukraine’s Manager Igor Mityukov believes that the government could pay attention to the legislative issues that remain unresolved. For example, according to him, there are some problems with the tax legislation in the segment where funding is most accessible — loans. According to the Law on Profit Tax, 15% of the interest accrued to investors must be paid to the state. Therefore, investors often have to find ways around such rules. On the other hand, the government itself creates ways of avoiding these rules by signing agreements on avoidance of double taxation with various countries. Around 90 such agreements have already been signed.

"The question arises — why keep some restrictions that we are successfully bypassing with the help of our own legislation? The Ukrainian borrower is forced to make extra expenditures that could have been avoided," said Mityukov.

The second issue is currency regulation, which currently does not apply to Eurobonds in Ukraine. "In order to issue Eurobonds to any Ukrainian private or public company, it is necessary to scratch the left ear with the right hand because the currency regulation recognizes only loans. Since transactions involving issue of Eurobonds take place outside the territory of Ukraine, the National Bank must issue a special resolution equating funds raised through bond issues to a loan. All this is very difficult," said the banker.

At the same time, he stressed that this process can be simplified only through the joint efforts of both lenders and regulators.