Eight years in expectations: how the lack of the Investment Compensation Procedure hinders the development of port infrastructure

01/ 10/ 2021

Daria Sichkar. The EBA Logistics Committee Manager. Last year, the European Business Association conducted for the first time an expert study of the general state of transport infrastructure development in Ukraine – the Infrastructure Index. The study results showed that most business experts – 67% support such a form of investment in infrastructure projects as public-private partnerships (PPPs). Such an instrument is increasingly becoming popular in Ukraine. And moreover, it has active support from the state. The business community considers that further development of PPPs, including concessions, would allow Ukraine to modernize and expand its infrastructure in the most efficient and least costly way. However, one acute issue has long been on the way to attracting new investments in port infrastructure development. We are talking about the regulation of the compensation for investments in strategic objects of port infrastructure. The Procedure for Compensating Investments in Strategic Port Infrastructure has been missing for a long time now. Its development was provided in Article 27 of the Law on Seaports of Ukraine dated 2013, so more than eight years have passed with no progress made in this direction. The need for the approval of such a Procedure is due to the dire state of the domestic port infrastructure that requires immediate large-scale renewal and capital investment, which, unfortunately, the state cannot provide. This calls for funds from private investors who have the initiative and intention to invest in the development of Ukraines seaports but do not have any regulatory mechanism to recoup their investments. Adoption of this Procedure in the wording, that has a balance of public and private interests, is a strategic and crucial issue for the revival of the domestic port industry. In such a case, for the first time in many years, Ukraine will have a transparent and effective mechanism for attracting private investment in port infrastructure that is so needed today by both the state and investors. The EBA Logistics Committee experts have developed such a Procedure, but its wording does not fully satisfy the authorities, including the Ministry of Infrastructure of Ukraine. The business and the state mostly have contradictions concerning some provisions that envisage the compensation for the cost of underwater hydraulic structures built with the private investment before the entry into force of the Law on Seaports and with the consent of their owners can be transferred to state ownership on a compensatory basis. The wording of the Procedure proposed by the Ministry of Infrastructure stipulates that it is not the cost of the underwater hydraulic structure (UHS) that is compensated, as stated in paragraph 3 of item 5 of the Final Provisions of the Law on Seaports, but the cost of the construction of such UHS. And the business cannot agree with it. Thus, the Procedure must be developed and approved in consideration with the Law of Ukraine on Seaports which clearly stipulates that the amount of compensation is determined by the results of an independent assessment. Such an assessment should determine the amount of compensation and it is not limited to the amount of money spent on the construction of the underwater hydraulic structures. Another contradictory provision proposed by the Ministry is that the compensation of the cost of the UHS is carried out at the expense of the port dues received by the owner of such UHS. If the UHS owner has received funds in excess of the cost of such compensated UHS, then the excess must be transferred to the Ukrainian Sea Ports Authority (USPA). The UHS owners consider this provision to be absolutely illegal as it contradicts the Law on Seaports of Ukraine which does not provide for any transfers of port dues money in favor of the USPA. In fact, it means the gratuitous transfer of the UHS to state ownership. The Law on Seaports of Ukraine established the right of the UHS owner to collect the port dues, and thereby recognizes that such funds belong to the UHS owner. Thus, these funds are limited to their intended use, but they remain the property of the person entitled to charge the port dues. Besides, the funds in question are received as a payment for services which is paid from port dues. And therefore, they are the income of the person providing such services and are subject to income tax accordingly. The latter fact additionally indicates that having received the income tax on such income, the state confirms the ownership of the port dues money to the UHS owner who provides services for the use of such underwater hydraulic structure and pays income tax on such funds. These are the most critical points in the Procedure which still need to be agreed upon. In fact, they are the reason behind the delayed adoption of the Procedure itself. The EBA Logistics Committee member companies note that given the current crisis and the unstable economic situation in the country, it is likely that the capabilities of state enterprises will be quite limited, including the Administration of Seaports of Ukraine, whose main function is the development of strategic port infrastructure. The business has repeatedly declared its readiness to invest in strategic objects of port infrastructure. However, this readiness is limited by the lack of terms for compensation of such investment given the fact that the investment objects are not transferred to private ownership. The development of the draft Investment Compensation Procedure began in 2013. This draft has been repeatedly published in various editions for discussion and further revision. Despite this, the draft Investment Compensation Procedure has not yet been approved and submitted to the Cabinet of Ministers of Ukraine. So, there is an urgent need for this document to be approved in view of the crisis and the lack of sufficient investment in strategic port infrastructure. Thus, we look forward to the adoption of the Investment Compensation Procedure developed by the EBA Logistics Committee experts together with representatives of the Ukrainian Sea Ports Authority and the Ministry of Infrastructure of Ukraine, although the latter is reluctant about publishing the draft document for public discussion. Source: magazine MINTRANS

Daria Sichkar The EBA Logistics Committee Manager

Last year, the European Business Association conducted for the first time an expert study of the general state of transport infrastructure development in Ukraine – the Infrastructure Index. The study results showed that most business experts – 67% support such a form of investment in infrastructure projects as public-private partnerships (PPPs). Such an instrument is increasingly becoming popular in Ukraine. And moreover, it has active support from the state. The business community considers that further development of PPPs, including concessions, would allow Ukraine to modernize and expand its infrastructure in the most efficient and least costly way.

However, one acute issue has long been on the way to attracting new investments in port infrastructure development. We are talking about the regulation of the compensation for investments in strategic objects of port infrastructure. The Procedure for Compensating Investments in Strategic Port Infrastructure has been missing for a long time now. Its development was provided in Article 27 of the Law on Seaports of Ukraine dated 2013, so more than eight years have passed with no progress made in this direction.

The need for the approval of such a Procedure is due to the dire state of the domestic port infrastructure that requires immediate large-scale renewal and capital investment, which, unfortunately, the state cannot provide. This calls for funds from private investors who have the initiative and intention to invest in the development of Ukraine’s seaports but do not have any regulatory mechanism to recoup their investments.

Adoption of this Procedure in the wording, that has a balance of public and private interests, is a strategic and crucial issue for the revival of the domestic port industry. In such a case, for the first time in many years, Ukraine will have a transparent and effective mechanism for attracting private investment in port infrastructure that is so needed today by both the state and investors.

The EBA Logistics Committee experts have developed such a Procedure, but its wording does not fully satisfy the authorities, including the Ministry of Infrastructure of Ukraine. The business and the state mostly have contradictions concerning some provisions that envisage the compensation for the cost of underwater hydraulic structures built with the private investment before the entry into force of the Law on Seaports and with the consent of their owners can be transferred to state ownership on a compensatory basis.

The wording of the Procedure proposed by the Ministry of Infrastructure stipulates that it is not the cost of the underwater hydraulic structure (UHS) that is compensated, as stated in paragraph 3 of item 5 of the Final Provisions of the Law on Seaports, but the cost of the construction of such UHS. And the business cannot agree with it.

Thus, the Procedure must be developed and approved in consideration with the Law of Ukraine on Seaports which clearly stipulates that the amount of compensation is determined by the results of an independent assessment. Such an assessment should determine the amount of compensation and it is not limited to the amount of money spent on the construction of the underwater hydraulic structures.

Another contradictory provision proposed by the Ministry is that the compensation of the cost of the UHS is carried out at the expense of the port dues received by the owner of such UHS. If the UHS owner has received funds in excess of the cost of such compensated UHS, then the excess must be transferred to the Ukrainian Sea Ports Authority (USPA).

The UHS owners consider this provision to be absolutely illegal as it contradicts the Law on Seaports of Ukraine which does not provide for any transfers of port dues money in favor of the USPA. In fact, it means the gratuitous transfer of the UHS to state ownership. The Law on Seaports of Ukraine established the right of the UHS owner to collect the port dues, and thereby recognizes that such funds belong to the UHS owner. Thus, these funds are limited to their intended use, but they remain the property of the person entitled to charge the port dues.

Besides, the funds in question are received as a payment for services which is paid from port dues. And therefore, they are the income of the person providing such services and are subject to income tax accordingly. The latter fact additionally indicates that having received the income tax on such income, the state confirms the ownership of the port dues money to the UHS owner who provides services for the use of such underwater hydraulic structure and pays income tax on such funds.

These are the most critical points in the Procedure which still need to be agreed upon. In fact, they are the reason behind the delayed adoption of the Procedure itself. The EBA Logistics Committee member companies note that given the current crisis and the unstable economic situation in the country, it is likely that the capabilities of state enterprises will be quite limited, including the Administration of Seaports of Ukraine, whose main function is the development of strategic port infrastructure.

The business has repeatedly declared its readiness to invest in strategic objects of port infrastructure. However, this readiness is limited by the lack of terms for compensation of such investment given the fact that the investment objects are not transferred to private ownership.

The development of the draft Investment Compensation Procedure began in 2013. This draft has been repeatedly published in various editions for discussion and further revision. Despite this, the draft Investment Compensation Procedure has not yet been approved and submitted to the Cabinet of Ministers of Ukraine.

So, there is an urgent need for this document to be approved in view of the crisis and the lack of sufficient investment in strategic port infrastructure. Thus, we look forward to the adoption of the Investment Compensation Procedure developed by the EBA Logistics Committee experts together with representatives of the Ukrainian Sea Ports Authority and the Ministry of Infrastructure of Ukraine, although the latter is reluctant about publishing the draft document for public discussion.

Source: magazine MINTRANS