The authorities are preparing not a show trial for the odious oligarch, but the privatization of the best port on the Black Sea.
The "government of reformers" appears to be copying the model of its predecessors: patriotic rhetoric conceals yet another "division" of state property for a specific client.
The whole country already knows how much every Ukrainian owes personally to Rinat Akhmetov. But that doesn't stop the coalition leaders from preparing for Akhmetov not a show trial, but... the privatization of the best port on the Black Sea. Today, even Yuriy Lutsenko doesn't even mention "Prison for the bandits!" And the Prosecutor General's Office seems to be guarding their interests.
The privatization of the prime assets of the Black Sea port of Yuzhny—strategically important for Ukraine—could become as grand a scam as the "privatization" of the Kryvorizhstal steel plant "for Pinchuk and Akhmetov." Or of part of the regional power company "for Babakov, a State Duma deputy." Or of Ukrtelecom—again, "for Akhmetov." And in all three cases, it directly benefits the Kremlin.
In the case of Ukrtelecom, Ukraine lost not only its national operator and the state telecommunications network as such, but also its special-purpose telecommunications network necessary for ensuring national security in the event of war. As a result, the state lost its monopoly-controlled government communications and securely protected telecommunications channels for military and law enforcement agencies.
In the case of the Yuzhny port, Ukraine could lose—effectively transferring control to Russia—the deepest port on the Black Sea coast, a highly profitable and strategically important facility for the state's economy.
We will provide a detailed account of how the "alienation" of the Yuzhny port is being prepared for a specific "customer."
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So, at the port of Yuzhny, they are cynically preparing the most economically attractive part of the port for "privatization" for SCM - the two berths with the heaviest cargo handling, which account for 80% of the port's cargo turnover.
The privatizers will leave everything else: the port infrastructure, worker dormitories, kindergartens, and so on, to the state.
It's significant that over the past year alone, the state has invested at least $50 million in these two berths—expensive, modern cranes, and deepening of the port's waters. During Viktor Yanukovych's presidency, no one made much of the fact that the port was being reconstructed at public expense for a quick resale to one of the presidential "family's" favorites. Things didn't work out under Yanukovych—Maidan happened.
Officially
The privatization of Yuzhny Port was revived at the end of 2014. More precisely, the Yuzhny Port is being prepared for concession: the State Property Fund of Ukraine announced a tender to select a company that will conduct an appraisal of its assets (applications for the tender are accepted until December 30, and the auditors' competition will take place on January 12, 2015).
According to the State Property Fund's requirements for auditors, they must have experience working with assets of monopolistic enterprises, as well as transport companies in Ukraine and other countries. Applicants must submit a list of at least five potential appraisers who have worked on the company's staff for at least five years and participated in the implementation of such projects. Furthermore, the applicant's track record must include contracts for the appraisal of fixed assets of enterprises totaling at least 10,000 units of fixed assets per project (the company must have successfully completed at least five such projects).
Given such high requirements, the auditors with the best chance of passing the competitive selection are the BIG4, the so-called “big four”: PricewaterhouseCoopers, Deloitte, Ernst & Young, KPMG, who have experience with such projects at the international level.
It should be noted that the concession does not cover the entire Yuzhny port, which, according to the Law on Ports, is a geographical concept, but only Loading and Unloading Area No. 2 (LUA No. 2), which includes a specialized coal and ore complex. The first loading and unloading area, property, berths, and other hydraulic structures of the Ukrainian Sea Ports Authority remain under the ownership and management of the state.
On December 30, 2014, the State Property Fund of Ukraine announced two tenders for the lease of state-owned property at the Illichivsk and Odesa ports. According to a report in the official publication, Vedomosti Privatizatsii, premises and storage areas with a total area of 73,37 square meters are offered for a 49-year lease at the Illichivsk port, as well as a 10,5 square meter non-residential space for a year. The Fund also intends to lease 22,1 square meters of space at the Odesa port.
We also note that this decision by the State Property Fund is consistent with current Ukrainian legislation and the parliamentary majority coalition agreement, which provides for the attraction of investment under various conditions.
However, it's worth remembering that Ukraine has a sad history of state-owned company reforms being blocked by third-party intervention. For example, in early August 2014, an open tender for an independent valuation of Ukrzaliznytsia's assets was held to form the authorized capital of PJSC Ukrainian Railways. Deloitte & Touche, Ernst & Young, and other auditors submitted bids. However, following a complaint from Poltava-based UkrBusinessConsulting, the Antimonopoly Committee of Ukraine terminated the tender, even though the company had not even requested documentation or submitted bids. Ukrzaliznytsia appealed the AMCU's decision in court. However, the State Property Fund should consider the risk of such actions to avoid similar situations in the future.
In the case of Yuzhny, such a situation is quite likely.
Below is a question-and-answer session on the operation to "privatize" the flagship of Ukraine's port industry.
Yuzhny Port – “made to order”?
Due to the complete secrecy surrounding this process, there is currently no factual confirmation that the port concession is being transferred specifically to SCM's benefit. However, logical reasoning about "who benefits" only leads to this conclusion.
1. Why did you decide to opt for a concession?
A concession provides investors with a relatively high return on investment with lower capital investment than privatization. There's no need to pay the entire amount for the asset being acquired from the state upfront.
Thus, a concession, compared to privatization, is a tool for reducing, i.e., spreading the investor's financial burden over a long period of time. A concession is not only simpler than privatization in terms of procedures, but also significantly cheaper... for the interested party.
2. Why was the concession granted to the Yuzhny port, which generates significant revenue for the state budget and operates efficiently?
Yuzhny Port is the flagship of the industry, a highly productive and profitable asset that generates significant revenue for the state. Enormous public investment has been made in infrastructure modernization and dredging. Today, Yuzhny is the deepest port in the Black Sea: it is the only one capable of handling vessels with a berth capacity of 200 tons.
Yuzhny Port is a highly profitable facility. In 2013, the port contributed approximately half a billion hryvnia in taxes and fees to budgets at various levels. In 2014, the company's tax revenues are estimated to be no less.
As we can see, this is not only one of the most powerful ports in the Black Sea, a flagship of the Ukrainian maritime industry, an effective market player, a socially significant and stable enterprise in the region, but also a major taxpayer, consistently filling the state treasury.
It's completely unclear why this particular port should be subjected to privatization experiments. From a state perspective, such a move is inexplicable, but it could be explained from the perspective of other interests.
In recent years, Yuzhny Port has been handling SCM's cargo traffic, handling over 1 million tons of cargo per month. This port is a strategic asset in SCM's logistics. For this reason, SCM's owners are striving to gain complete control over this asset. Such control will not only allow them to monopolize the stevedoring market but also significantly reduce SCM's cargo handling costs. The port will become a kind of SCM transport workshop, no longer paying market rates but only the amount needed to support current operations.
Thus, there are no apparent state interests in the potential concession of the Yuzhny port. However, the privately held SCM clearly has an interest in gaining control over a key industry asset and significantly reducing its costs for handling its own cargo at this port. This, naturally, will reduce the port's revenues and tax revenues to budgets at all levels.
Yuzhny Port truly works very effectively for the state. But apparently, someone in the government and the Presidential Administration really wants this port to work effectively for SCM.
The hastily conducted assessment of the Yuzhny port is clearly a preparatory stage for the transfer of the port from state to private management, as the calculation of the concession fee directly depends on the assessment. Given the above considerations, such an assessment will be the lowest possible, since, unfortunately, state interests are not the primary consideration.
There are no economic preconditions for assessing the port and transferring it—after all, it is an effectively operating enterprise, a market leader, which should remain in state hands and steadily fill the budget during this difficult period.
Moreover, in the current reality, it is impossible to obtain a fair and budget-friendly price for this strategic state asset, so why give it away for pennies?
3. Why is the auditor selection competition being held so quickly? What's the reason for the rush?
Such haste is truly difficult to explain from a common-sense perspective. After all, we're talking about a strategic, effectively operating state asset.
Such haste cannot benefit the assessment, and therefore the entire process.
Such haste in transferring the port to private ownership can only be explained by one thing: the appraiser has already been "selected." Such haste and the extremely tight deadline are necessary only to ensure that the remaining companies formally invited to the tender simply don't have time to prepare their proposals. This is especially true given that the specified application and tender period traditionally falls during the holiday season. Therefore, the conclusion that this is a tender without a competitive bid, with a predetermined winner, is obvious.
This conclusion is followed by the following: if at this stage there is no transparency and concern for the quality and thoughtfulness of the entire process, then to say that someone is doing something in the public interest is self-deception.
4. Is concession being considered for small and medium-sized ports, which are currently in dire need of investment and are operating on the brink of survival?
Unfortunately, there's no point in talking about this; there's no information about it. No one wants to take on Ukraine's unprofitable and dying ports today, as it's truly costly, complicated, and troublesome. Therefore, they decided to start with profitable, "flagship" state-owned assets, in which certain non-governmental entities have a vested interest.
Recently, the head of the Ministry of Economic Development, Aivaras Abromavicius, stated: "We have a total of 3374 state-owned enterprises, of which 1920 are operational. The top 100 state-owned enterprises account for 92% of turnover, so the main thing is to focus on them, as in the first six months alone, they generated 67 billion hryvnias in damages to the country," the minister explained.
This raises another question: why didn't they start with the unprofitable ports, as the minister stated, but with the industry's flagship, a reliable source of income for the state budget? What is the state's interest here?
5. How transparent is the Yuzhny port concession tender planned to be? How will information be disclosed?
Given the “transparency” of the short-lived preparatory procedures, one cannot expect transparency and effectiveness of the concession tender.
The following provisions of the Law apply to the procedure for disclosing information:
according to the Law of Ukraine "On Concessions",
— Art. 8, Part 1. The announcement of the start of the concession tender and its conditions shall be published in the newspapers “Uryadovyi Kurier” and “Golos Ukrainy”;
— Art. 8, Part 4. Applications must be submitted within 60 days from the date of announcement of the competition;
— Art. 7, Part 4. The review of applicants’ applications shall be carried out by the selection committee within 45 days from the last day of application submission;
— Art. 7, Part 7. The winner is the applicant who offers the best conditions for the execution of the concession in accordance with the terms of the competition;
— Art. 8, Part 6. Information on the results of the competition, the grounds for recognizing the winner and rejecting proposals from other participants shall be published on the official website of the concessionaire and, no later than 10 days later, in the newspapers "Uriadovyi Kurier" and "Golos Ukrainy".
The competition has not yet been announced. The procedure for conducting the competition is also unclear. In civilized countries, concession competitions are organized by internationally reputable investment banks under the mandate of the State Property Fund, with broad public participation. The terms and conditions are announced at least six months before the competition. In Ukraine, the terms and conditions are announced two months before the competition, and the winner is selected by a closed committee.
The application deadline is set at just two months; it's virtually impossible to analyze all aspects of the proposed asset and the business model for its future use in such a short timeframe before preparing the application. A truly independent competition should offer realistic conditions for participation. This is not the case with the Yuzhny port.
Moreover, the publication of the competition's launch in the Uriadovyi Kurier and Golos Ukrainy newspapers is clearly insufficient to attract the participation of international leaders in this business segment who have significant experience in the effective management of port assets.
In addition to the lack of transparency in the procedure itself and its lack of focus on the best outcome, the concession law does not require a tender at all. Thus, according to Article 2 of the Concession Law, "the selection of concessionaires shall be carried out on a competitive basis." This means that, technically, a tender can be dispensed with.
6. What benefit will the state receive from the concession of part of the Yuzhny port? Are we talking about a one-time benefit and further revenues from the concessionaire's work at the port?
If the port generates a certain profit for the state, after its transfer to concession, the state treasury should receive no less than it currently receives, but more. At a minimum, tax revenues should be no less than before the concession, plus a fair concession fee.
Let us reiterate: today, the Yuzhny port provides tax payments to budgets at all levels in the amount of approximately half a billion hryvnia per year.
According to current legislation, the concession fee will depend on the port's asset valuation, taking into account the industry's return on assets ratio. This will artificially minimize the concession fee, amounting to less than 5% of the assessed value per year. Under current circumstances, there is little hope of a fair valuation of the port's assets. Unfortunately, the haste with which the port's asset valuation is being conducted, as well as the closed nature of the procedures and the concession tender itself, leave no room for hope for a different outcome.
It should also be noted that even minimal concession payments do not guarantee the state will receive them.
According to Part 3 of Article 20 of the Law on Concessions, capacity development in the interests of the concessionaire may be financed through current concession payments, i.e., at the state's expense. This means that the state not only sells the port asset for next to nothing and reduces its revenue, but also finances capacity development in the interests of the concessionaire from its concession revenues, reducing its debt burden and expenses.
Moreover, according to Part 5 of Article 15, if the concession agreement is terminated, the state must repurchase the concessionaire's investments in the concession assets, financed using the state's concession revenues, at its own expense. Under these circumstances, the concession port will not only be lost to the state but will transform from a financial source into a budget drain.
It is important to understand that for a vertically integrated group like SCM, port capacity is not a source of profit, but a cost item, an expense item for the logistics of the core business.
In this situation, the natural inclination of such a concessionaire would be to reduce its handling costs, i.e., tariffs and port asset revenues. This will inevitably lead to a minimization of the tax burden and state revenues from the concession asset.
As a result, such a concessionaire will receive full control of a functioning port asset at a price significantly lower than the privatization price, with a fixed minimum concession fee. This will minimize its handling costs and the state's tax revenues.
Clearly, in such a situation, such a concession deal is only beneficial to the concessionaire. The state, however, cannot benefit from it and increase its revenues in the long term. On the contrary, tax revenues will only decline.
It's difficult to call such conditions beneficial for the state, especially considering that the state has made colossal investments in the Yuzhny port, making it the most advanced and profitable enterprise in the industry.
The laws of logic and economics do not explain how the state benefits from such a deal.
7. What obligations will the concessionaire assume for the Yuzhny Port concession? How will the concessionaire influence the port's operations and collaborate with other companies currently operating in the port?
The concessionaire's obligations will be specified in the concession agreement. Currently, they are unknown—the procedure is highly confidential, as discussed above.
Regarding the influence of the concessionaire on the work of other entities, the following should be noted.
For example, Article 2 of the Law “On Concessions” requires: “safeguarding the legal rights and interests of the living goods (work, services) that are provided by the concessionaire.”
However, it should be noted that the main contenders for port assets in Ukraine are vertically integrated groups. The port of Yuzhny is, first and foremost, a strategic asset for SCM.
Their acquisition of port capacity will lead to monopolization of the sector and the strangulation of unaffiliated cargo owners, who will lose access to maritime exports. This will lead to a redistribution of the market and even greater concentration and monopolization. Therefore, of course, transferring the asset under concession to an entity that is a consumer of these services will have a negative impact on the market and healthy competition.
This is precisely why, in order to maintain a competitive environment and comply with the law's requirement for equal access to concession asset services, it is necessary to involve, first and foremost, independent seaport operator companies in the concession tender, rather than vertically integrated groups such as SCM.
8. Is the possibility of participation of international logistics companies in the concession tender being considered?
The possibility of such participation is not prohibited, but no real work has been undertaken to attract such companies. The public is unaware of the government's actual steps in this direction. Given the current procedures for preparing the concession tender, actual participation is unlikely.
9. What should the fixed concession payment be? Current legislation stipulates no more than 7% of the asset's value. Will this figure be revised?
Unfortunately, according to current regulations and procedures, the concession fee will be less than the maximum possible 7% of the asset value. Furthermore, it's important to remember that, under current circumstances, it's also impossible to expect a fair valuation of the port's assets.
A bill amending concession legislation (No. 4237a, dated July 3, 2014) was registered in parliament. However, the document does not propose all the necessary changes, but any important adjustments can be made during its consideration.
Specifically, it is necessary to establish that the fixed concession payment must be no less than 15% of the assessed value of the transferred property complex. Currently, it is only 7%, which, using the return on assets indicator, is reduced to a realistic 3%. The possibility of reducing the rate should be provided only for enterprises performing socially significant functions and services—pharmaceuticals, prosthetics, the production of essential goods, and experimental and science-intensive industries.
It is crucial to establish a condition under which the development and modernization of the concession asset must be carried out at the expense of the concessionaire and will become a mandatory condition, failure to which will result in the concession agreement being terminated.
It's also necessary to stipulate a requirement for the concessionaire to increase the asset's economic return to the state. Simply put, the asset under the concession must be more efficient than before, across all metrics. If there's no development, what's the point and benefit for the state of such a transfer?!
Equally important is to establish a mechanism for state participation in the asset's use. This could be a fixed rate per unit of output. For example, for ports, it could be one dollar per ton handled.
Only such a procedure will truly encourage the concessionaire to effectively manage the acquired asset, rather than parasitically use it for its own interests to the detriment of the state.
A three-stage mechanism for calculating concession payments is widely used in global practice.
1. The investment component is the investment the concessionaire undertakes to make in upgrading the asset, purchasing equipment, upgrading, and improving existing technologies and facilities. This investment is determined by the required measures and their market prices.
2. A fixed annual payment—based on existing social obligations and the maintenance of services throughout the port. This is the "leasing" price of the asset, regardless of how efficiently the concessionaire uses it. The state sets a minimum amount, no lower than the current level, and auction participants increase it by competing with each other. The state must be guaranteed to receive funds no less than the amount it would have earned without the concessionaire.
3. A variable fee, which the concessionaire pays depending on cargo turnover—either per tonnage or per hryvnia of revenue. This creates a win-win situation, where the state increases budget revenues while creating favorable operating conditions for the concessionaire.
We are not seeing any of this in the case of the Yuzhny port—and this is yet another reason to pay close attention to the upcoming deal, both from true Ukrainian patriots and from our country's international financial donors.
Many of the "oddities" surrounding the "quiet privatization" of the Yuzhny port can be explained by the answers to the questions published below:
Yuzhny Port is a profitable and highly effective state asset that operates reliably, generates significant budget revenues, and plays a key social and economic role in the region and industry. Why give up this "golden" asset, especially now, when it's impossible to obtain a favorable price due to the difficult situation in the country? Wouldn't it be better to leave this profitable asset in the hands of the state until a time when it can fetch the highest possible price?
Who personally in the Government and the State Property Fund decided on the feasibility of transferring the Yuzhny port? Who personally took responsibility for these actions, and what does this responsibility entail?
Who personally at the State Property Fund decided to hold the tender for the Yuzhny Port property appraisal, and what prompted such a tight deadline? Why such a rush in this important matter?
Was there a government order, approval, or clarification from the ministries involved regarding the commencement of the port assessment process? What official document defines and establishes the feasibility, requirements, and timeframe for assessing Yuzhny Port, and what is the purpose of such an assessment?
Why is it planned to select only one appraiser to conduct the property valuation?
Given the importance of the Yuzhny port for the state, wouldn't it be better to engage at least two independent appraisers from Big 4 to obtain the most objective assessment possible—after all, we're talking about a strategic asset?
Argument will seek answers to these questions.
"Pocket privatization" in the style of "early Kuchma," "mature Tymoshenko," or "late Yanukovych" is unacceptable—it has already led Ukraine to the point where key assets are owned by Russia, a hostile state, and its "fifth column" of local oligarchs. This, in turn, has become the pretext for the Kremlin's attempt to dismantle Ukrainian statehood and the mass murder of Ukrainians.
Handing over Ukrainian state property to sponsors of the Yanukovych regime, who are closely monitored by Russian intelligence agencies, is not only immoral but also a betrayal of the state's interests.
We hope that the authors of the scenario for "writing off" the port of Yuzhny are aware of the possible consequences—both for the country and for themselves personally.
(To be continued).
Konstantin Ivanchenko, "Argument"
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