Infrastructure Talk with Yuriy Gubankov, president of Brooklyn-Kiev
Infrastructure Talks are led by Dmytro Pavlenko, Tax & Legal Director, Head of Infrastructure Industry Group at Deloitte Ukraine, PhD in Law, and lawyer.
His interlocutor was Yuriy Gubankov, one of the leading businessmen in the Ukrainian infrastructure, owner and president of Brooklyn-Kiev, the largest private stevedoring company in the Odesa port; president of the Association of Stevedores of Odesa Commercial Sea Port (OCSP).
Dmytro Pavlenko: Yuriy, what is your vision on the development of the sea port infrastructure in Ukraine? What needs to be done to increase their competitiveness and enhance performance?
Yuriy Gubankov: I assure you, no one will give you a simple answer to this question as it is a multi-faceted issue. I strongly disagree with the opinion that the entire transport industry should remain in the state's ownership, nor do I agree that all of it should be private. Each case is unique; and there is no single recipe. I believe, some ports built in the Soviet Union and operating efficiently today must be state-owned if their capacities allow them to serve as public ports.
However, many may not share my opinion. Let's take the Yuzhny port... It is one of the newest deep-sea ports, one of the most modern and promising public ports that can easily compete in any area, with its management being the only stumbling block. This port has all necessary facilities; and the prospects of its development and its efficiency will only depend on how the state will use it.
As may be illustrated by the Mykolaiv port, the Kherson port that has now been put up for concession, and some others, many Ukrainian ports need further developing. The state is unable to support them. These ports require more than just effective management; they need go-getter managers who would be dare enough to assume risks.
Some ports, e.g. OCSP, are made up of separate cargo-handling complexes that may well be sold to the private sector. I've mentioned the Odesa port not because Brooklyn is based there, but rather because it is one of the ports with the oldest core assets that require reconstruction and further development. Needless to say that the ministry has made no particular effort in this area for 28 years since the collapse of the Soviet Union. I can still well remember that period in 1991-1992 when cargo traffic at sea ports plunged 70%. At that moment no one could be tempted by such “honeypot” – ports required investment. Naturally, they remained under the radar.
Now when a lot of money has been invested and cargo traffic is heavy, it’s arousing everyone's interest but they forget what happened 28 years ago. Do you want ports back in the state's ownership again? Then you have to return all the investments made. Nobody wants and nobody needs this. As of today (I am talking about Odesa), among investors are a lot of enterprises with equity participation of the most powerful companies, such as CMA, Louis Dreyfus, ADM, Cosco, HHLA, Olimpex. These are globally renowned companies that have made real investments in the infrastructure of the Odesa port. Why shouldn't they be allowed today to privatize these enterprises? The state budget will receive additional money, too.
The Chernomorsk port is the newest port and has a great potential for effective development. All that's needed is a will and desire to have a go. However, the cargo flow to Ukraine is very limited now, which entails certain complications. This means that any development of one port involves further redistribution of cargo flows through other ports, resulting in fiercer competition. Yet, it needs to be done.
Otherwise, all Ukrainian ports will lose cargo traffic, and we will lose our competitiveness. Amid hybrid war, with loss of transit, we have to struggle to remain in business. This makes me believe that a way out of this situation is to professionally and correctly define a development strategy for the entire transport industry with a clear separation of what should be leased, or put up for concession, or privatized, and what should remain under the state's control. These are the four existing forms of ownership; they are understood all over the world and should exist and develop here.
D.P.: Do you mean that investors should ideally be able to choose from different options: lease, public-private partnership (PPP), privatization or development from scratch?
Yu.G: Exactly. In addition to private enterprises that were built from scratch and that are experiencing abundance of difficulties just because they have become successful. Yet, no one would care for them should they be falling apart. Once they start to make profit, there is always someone to say, ‘hey, they are stealing cargoes from the state!’ But this is not so. Who steals? Try and invest, and you will end up with the same result!
It’s like an urban development master plan. The master plan shows that a certain land plot is for construction of a cinema. Is there anybody wishing to build a cinema here? Go ahead and do it. That area is for residential quarters; come and build residential quarters, whoever wants to...
The industry needs a development master plan to be created. Then each enterprise will choose its niche, its field of activities, depending on their specific capabilities.
D.P.: What about the existing policy papers, e.g. the National Transport Strategy or the new USPA's (Ukrainian Sea Ports Authority) strategy?
Yu.G: I have recently read the National Strategy. It is very generalized. You can use it to substantiate anything you want to. This document does put forward the necessity of developing the infrastructure; but this need is crystal clear to everybody even without reading the strategy. The Ministry of Infrastructure's task—to work out a detailed “master plan” for development of the industry—may be entrusted to consulting companies. Once it is done, we will have a picture of what and how much is needed...
Today, we are in total chaos: everyone rushed to construct elevators. As a result, we may soon face the lack of facilities to handle general cargoes. Even in the Odesa port, all available area is under elevators, leaving very limited space for handling metals.
The same applies to containers. At present, we have plenty of container spaces. If a container terminal is launched at the Chernomorsk port, there will be a significant excess of container facilities... we did not have so many containers even in our best years. Today, considering all container terminals and the Chernomorsk port, we can actually make 1.5-2 million TEU a year. Where to get so many containers?
We have special programs in this area; we are not going to give up these volumes.
D.P.: What are the main competitors of Ukrainian seaports today? Ukraine has very high port charges, the highest ones in the Black Sea. Is it so? The charges were cut down in 2018. How did this affect the cargo handling volumes?
Yu.G: We stick to the principle: cut down on one thing and add on another. This is exactly the rule on which we want to build the system. As reduced port charges result in decrease of the USPA's income, it needs to find sources to return the funds. Thus, on the one hand, tariffs were cut down for cargo owners and increased for stevedoring companies. This balanced the system out. Believe me, port charges had no effect on the volume of cargo handling. If you reduce them today, yes, they will be more attractive. But due to what? As freight charges will be lower (port charges included), the price of the goods may (but not necessarily) become lower, too...
The key point here is who will ultimately benefit –trader or farmer? Which of them? This is the question. Ideally, this difference will be borne by traders and farmers equally. However, today's port charges do not really affect cargo flows. We exported grain and metal; and so we will.
D.P.: Does this mean that we neither struggled to compete with other Black Sea ports for transit, nor we do it now? In terms of export of Ukrainian raw materials and products.
Yu.G: As I see it, this is a political rather than economic issue. Why has Ukraine ceased to be a transit country? For one simple reason, Russia said that the entire railway tariff for Ukrainian ports would be 30% higher than that for Russian ports. This is an economic lever, but it has underlying political motives. But for political background, Ukraine would be a transit country.
Talking of ports in Russia, Novorossiysk is completely full; it is impossible to get in there and the current grain handling rates are 2-3 times higher than in Ukraine, as far as I know.
D.P.: Is transit through Ukraine and participation of Ukraine in trans-Eurasian routes and corridors possible without the Russian factor? For example, China or India – cargo handling in the ports of Greater Odesa – the European Union...
Yu.G: Yes, I consider this area to be the most promising and needing active development. I also think that the latest actions that allowed Belarus to share a common customs zone with Russia can help us break into this market by creating hubs, internal dry ports, and industrial parks. We could take actions similar to what was done near Minsk in Belarus.
To achieve this, we need to create favorable conditions; the government of our country should make their most vigorous effort in this respect. As you know, Belarus has recently introduced tax benefits allowing tax-free work for five years, thus creating the conditions to attract more companies.
Export-import companies try to have more than one route, just like in a well-known proverb about putting eggs in different baskets. Belarus used to be one of the baskets whereas it has turned into one large basket today. Therefore, there is a serious risk for companies. Ukraine is the second basket that is today more oriented on Europe and more trusted by Europe, despite our hard times. Ukraine is a democratic country with great prospects for development.
If we provide benefits to such companies, we may achieve a real breakthrough, including that in transit. This will boost both the development of the industry and export of food products to China and Asian countries.
D.P.: So we've immediately got to the point where to start writing an action plan...
Yu.G: You see, the problem is that we sometimes put too much trust in Western companies with big names, asking them “Will you write a strategy for us?” This reminds me of a situation when you have just bought an apartment and turn to a designer: “Will you make an interior design for me?” Though, you already know what you want, by and large.
Here we have a similar case, but we need to remember that the conjunction of conditions in one particular country differs from that in the others. Even the most prominent companies operating in Ukraine cannot just “hatch” a strategy – they have to closely cooperate with local partners. They will not be able to make a difference unless they involve local players with their knowledge of the local market and its specifics.
With respect to the strategy, its development should be entrusted to nobody but a powerful group made up of various local partners, companies, structures, and able to “hatch” the strategy. Foreign experts may then be involved to fine-tune the approaches developed. This would be right.
When it comes to competitors, these are ports of Romania or, broadly speaking, all Mediterranean ports. Ironically, but faraway Malta can easily turn into a transshipment hub. Therefore, we need a strategy for global development on the long term horizon.
D.P.: My next question will be more personal. Your business has operated for over 20 years. According to the State Register, you, Yuri, are the ultimate beneficiary of Brooklyn-Kiev. Since 2005, you have been the owner and CEO of the company that is now the largest private stevedore at the Odesa port and that ranks second in Ukraine after TIS group. It's been a long and successful way. Can you briefly tell the story of your business, outlining its main stages?
Yu.G: At one of the conferences, I admitted that I pay a huge tribute of respect to civil servants as they work in incredibly difficult conditions. If I, as a private partner, were put in the same environment I would probably end up in prison for a long time, or be killed. I have failed in quite a few business areas. I have lost quite a lot of money invested that never paid off. This is my experience gained through taking hard knocks.
It just happened so that I failed my thesis defense (it was an economic and financial thesis, 1985) in Odesa. My thesis focused on the economic efficiency of financial activities of seaports and shipping companies. They didn't accept it on the grounds that it was too pro-Western. I decided to have another try and defend my thesis in Moscow. To my surprise, I was supported there. In some ways, that thesis defense helped me jump onto a private business “train”. In 1991, I began lecturing to lawyers as they suddenly felt they needed to know more about financial indicators, profit and taxes, as well as about the law on joint ventures. Those were whole new ideas for them at that time. It was hard for people to understand why we had to pay taxes when we get paid...
So I started lecturing; and later I was invited to join the company. I concentrated on its development. The license we obtained from the Ministry of Finance was the third license granted in Ukraine. Then we became rail freight and petroleum products forwarders. The money came rolling in. I thought they would never end at our accounts. Once, in 1986, my friends and I went on a cruise around Europe. We were given $30 for a month and it seemed absolutely fine. Just think what we felt receiving $600 thousand in the very first month of our work. This amount was not even cosmic, it was larger than cosmic (laughing – ed.). Then I realized one simple thing – money is nothing, it comes and goes. Though, at that moment I wasn't aware of its ability to vanish into thin air so quickly. It was when we began to develop, in many respects thanks to Myckola Pavliuk, head of the Odesa port, who proactively developed private and state partnerships and, creating joint ventures with the port. Petrex was created. The company was engaged in forwarding and built the 23rd warehouse in the Odesa port. Later, Inter-Terminal was created at the 14th berth. The first contracts the company concluded were with Germany-based company Meyer’s Sohn for handling of newsprint paper from Karelia. We were the first company to land contracts with Sumitomo Corporation for purchasing Toyota lift trucks for the Odesa port. That is, we were pioneers in many areas.
Our greatest milestone was the signing of an agreement with Apple Macintosh in 1994, under which we became its dealers in Ukraine. We had a copy center and we were dealers of Rank Xerox, Volvo, and IBM. All the above turned into reality not because I was so smart and insightful. The thing is that we could not find decent equipment, computers, cars in our country... So, we had to act on our own and create everything from scratch. We were building capitalism within a single enterprise.
Over time, we constructed a more powerful elevator in the territory of the shipyard; it was later sold to ADM and Oleg Nemirovsky. Then a container terminal was built, and then another grain terminal. This is the result of our many year ordeals.
D.P.: Cooperation with the EBRD... Was it some kind of quantum leap?
Yu.G: For myself I decided that I wanted to create a structure to provide a more or less stable regular workload rather than just here-and-now profit. That’s why we sought to establish such partnership. At first, it was in the form of contractual arrangements on joint activities with Meyer's Sohn, a forwarding company. After that we entered into an agreement with ADM, we created a 50/50 container terminal with CMA CGM, then a 50/50 company with Louis Dreyfus, thus securing the load of containers, grain.
The EBRD... It is not just a bank. The EBRD, as I see it, is a powerful political structure, able to influence public and other bodies as it itself funds many public projects, finances the railway and road transport, as well as other industries. Therefore, when the EBRD funds a private business, whether we ask for it or not, it automatically becomes a defender at the government level. In today's Ukraine, very few existing companies, especially in the transport sector, have been created from scratch, most of them – developed old facilities. Talking of Odessa, you won't do a thing there without top dollar. To get this top dollar from companies with famous names is a challenge. There are big risks; and they will never just throw money away.
Therefore, in this case, the EBRD is a good kickstart bringing to a better understanding of business, understanding of financial reporting, and transparency of business. You could hardly call it a “do-gooder”, but this is what the EBRD requires from you, making you achieve compliance with international standards in all areas (finance, labor protection, ecology, energy efficiency, etc.).
For example, in 2012-2013, the EBRD helped us a lot to resist a raider attack and illegal seizure of our grain terminal. There were requests to the Cabinet of Ministers, and to the Minister of Foreign Affairs, and to embassies. I am sure, had we been a 100% Ukrainian company, we would simply have been destroyed. Those events peaked d in December 2013.
D.P.: Was it pressure from preceding authorities?
Yu.G: Yes... The government signed a large contract for export of six million tons of grain; however, they had the export capacity of only two million tons–elevators in the Odessa port and the Mykolaiv port–lacking the capacity of 4 million tons. By then, our elevator was almost ready to be put into operation.
D.P.: You have mentioned your scientific work, your thesis. With my PhD in Law, I can also call myself a scientist and I am always interested in how science can be applied in practice. In fact, did your scientific base help you in business?
Yu.G: To my surprise, unlike my expectations, but... Yes!
D.P.: Are there any prospects and areas for applied science in the development of port business and stevedoring business today?
Yu.G: I don’t want to offend any of the teachers, for I used to teach myself, but I am quite familiar with maritime education in England and in Ukraine... The difference is that the affreightment courses in England are conducted by a specialist with 25-30 years of relevant experience, who has no prescribed curriculum to lecture things that do not differ much from textbook materials.
I think, there should be close cooperation, some kind of alliance, between universities, academies, and specific production. Production has no time to do science. Universities often appear out of touch with practice because they have a curriculum that is incredibly difficult to change. Lecturing outside curriculum is a violation of the law. I regret to say that we do not have so needed collaborative efforts. I'm not talking about sailors or navigation, I'm talking about the port industry, operating activities. Science in the form you are talking about it is not enough. I believe that this is very important for the port, for the industry, for technology.
When we were building our container terminal, I went to Malta for the first time and saw 15 trailers running like a snake: a big rig hauling 15 containers. They are programmed, all containers repeat maneuvers of the big rig. These are completely new technologies. Sure, they have more space. In any case, once we have an opportunity, we will certainly implement it.
D.P.: Will we continue to buy technology in the West or in Japan?
Yu.G: What do you mean by technology? Technology is the proper arrangement of work with proper use of machinery. Today we have no industry. Unfortunately, we have no plants to manufacture cranes, reach stackers, loaders... I can't but admit that we cannot produce them, unfortunately. Everything that is produced there is done on the basis of modern technologies developed there. You can reach out to our institutes, offering: “Guys, let's create something new,” but this is not feasible in practice.
We can score a big win in such extreme situations. For example, the state has not built a jetty for Brooklyn-Kiev. I was sitting and thinking about what might be not working right... In the end, I took containers, made them paired, and began to load containers with grain. We have got a patent for it. But that’s not because my exceptional smartness, but because we were faced a challenge of how to survive. That was the result.
To get off the ground and start making money in port business, it may take you dozens of years. Look at programmers. All they need is a desk and a computer, and then tadah! – the company costs $850 billion... Google, Amazon... Here you create, build jetties, dig the sea bottom, seek people, and then... tadah! – the company costs some $100 million, in contrast to $850 billion there.
D.P.: Does it mean that we have a slim chance to catch up with technological progress?
Yu.G: May God help us implement the technologies that we already have. All of them cost a lot of money. It may be possible to make a revolutionary breakthrough, but I can’t imagine how. We will never be able to overtake them evolutionarily, because they have more effective and flexible elements of evolution, and they are more prepared to progress.
Today, in order to do all this, we have to economize where possible, whether we like it or not. We have to pinch pennies, losing a lot of money as a result. This never allows us to make a breakthrough. It's hard to build something new on the old foundation, that is to come up with new ideas using old equipment... I do not want to say that it is impossible. I'd rather use the word “hard”. Someone is anyway bound to make a breakthrough in our reality one day.
D.P.: We need something to believe in. Israel is a textbook example. In the sixties, this country used to be a backward country engaged in warfare, whereas now it successfully competes with the Silicon Valley in technology and startups. But let's get back to the port. What companies does Brooklyn-Kiev compete with today and what is your competitive advantage?
Yu.G: It wouldn't be completely right to say that we are competing with anybody because we operate in our own niche. We have our partners who are also our clients we work with. We are confident in them, they are confident in us. We know that they have their own financial interests and shares in these enterprises. Why should they go to anybody else? There is competition in only one thing – in tariffs, who will offer lower tariffs. I offered lower rates, I got the clients.
There are 2-3 companies engaged in a similar type of activities in the port, but we never intersect. We do not occupy their business, they do not go for cargo flows of our partners. Today, the market and customer base are divided.
D.P.: We can see that the supply of handling capacities has recently been growing in the segment of grain port terminals, which creates prerequisites for their possible proficit in the near 2-3 years. This factor affects the grain handling rates. Do you think this may affect the market position of your company and the operating profitability of the grain terminal?
Yu.G: Sure! It is already affecting, not just may affect. 6-8 years ago, these rates were $20, now they've fallen to $9-7.5. In Europe, these rates are 4-5 dollars. This means that these rates can be reduced to 2-3 dollars, if the technology is properly organized. The gross margin and profitability will definitely decline. Everybody understands this. Accordingly, at the moment it is very easy to see the market value of grain, barley, and corn. Knowing the transport component, you can calculate everything, how much it costs.
D.P.: Do you have a strategy? If you do, what is its goal and what are the points of growth and development?
Yu.G: This relates to what you asked before, whether my thesis can be applied... The thesis specified a number of characteristics that each business has: financial indicators, time indicators, need in capital and investments, stabilization, recovery, stabilization again, then investment again... There are certain time limits. Each business line has its own time frames that are different for an elevator, for containers, and for forwarding...
Therefore, we try to build our entire strategy so that we can avoid raising loans that have to be paid back. Today, it's at best 14-16% per annum on dollar loans, let alone loans in hryvnias. So, if you avoid raising loans and work using the profit generated from a more successful business line to invest in the other one without bank loans, you can take it as if you already received 14% of profitability.
Sometimes, if you lack working capital needed to ensure cost-efficiency or to complete the investments faster, you may have to lend some part of the money required. Such optimized investing of credit funds and equity is, probably, the strategy.
The next point of growth is our partners many of whom work with us 50/50. People sometimes ask why 50/50. This is wrong. How can you work 50/50 with clients? But we find a common language. This is probably the strategy of negotiations and arrangements between partners, cargo owners, and stevedores.
D.P.: What is the biggest obstacle to development of your business? Legislation, corruption, high lending rates, market conditions?
Yu.G: All of the above! I'm telling you. We have a loan from the EBRD, so we try to work without a hitch. The EBRD's lawyers check and double-check our activities. But our government authorities do not believe them. It’s not exactly that they don’t believe, maybe they believe, but this does not stop them getting tough on us. Before you can get tough, you need to create a problem. It is not difficult, considering our legislation.
For example, when I had a financial dispute with the port, absolutely all law enforcement agencies seized our documents to understand whether we stole electricity for two million UAH or not. But, I think that everyone understands why the law enforcement agencies took interest in this case.
D.P.: Talking of an excess of grain handling facilities, is there any lack of other capacities and is there any prospect to develop them?
Yu.G: I think there is a horizon of opportunities related to containers, including container base, container area and container processing, speed and quality of processing, etc. The future lies with these cargoes. You can’t imagine how many various cargoes are exported in all kinds of containers today, even coal and ore. No one would have believed it some time ago. Let alone metal, grain... It is a very promising area.
The right combination of new container processing technologies and maximum processing speed is where the future lies.
D.P.: There is a need in areas for containerized cargo processing, for cargo consolidation, and storage of containers. Are there such areas in the Odessa port, or in the adjacent territories?
Yu.G: Should they be available, they would have been occupied long ago and competing with us. It is not that they are not available, they need to be created. Physically, they can be created through investing. The only problem is that the government should want to give this opportunity. It is the state that should take the initiative and ask us, not the other way round.
Yu.G: It poses many problems. A new law is being adopted. Let's look at the Kherson port concession. It requires a mandatory investment of 50 million and mandatory handling of two million tons of grain cargo.
Stop, guys, you should decide whether my contribution is the handling of two million tons or 50 million investment. I'm a businessman, I am not an idiot! I will invest 50 million and do nothing, right?
On the other hand, your demand to handle two million tons scares because no one knows what the market conditions will be. I am ready to invest 50 million and this is huge money. However today, it may happen so that I invest the money but manage to handle less than two million tons, say, 1.9 million, which gives you the grounds to initiate the termination of our concession agreement. And how will 50 million be returned to me? I am more than sure that I won't see the money as I have not fulfilled my obligations under the agreement. I mean, if you want me to investment, let it be the only condition. Why do you want me to provide a guaranteed volume of handling, in addition?
Have you done anything so that I could handle over two million tons? It's not a big deal! Just give me two million tons and I will handle them. Today, with a proficit of handling facilities, you want me to construct additional facilities and oblige me to handle two million tons. How is that?
D.P.: Am I right to understand that you are ready to consider concession as an instrument if its offers acceptable conditions?
Yu.G: Absolutely. You understand that any sound idea can be reduced to absurdity and thus ruined. Supposing that an ultramodern concession law is adopted. You will simply ruin it with such concession conditions.
D.P.: If only policy-makers who elaborated the terms of the tender consulted with business, with you...
Yu.G: I would definitely remove the guaranteed volume of handling. I would suggest a recommended volume, not guaranteed.
D.P.: Are these conditions just pulled out of a hat in the government offices?
Yu.G: No, I wouldn't say so. I understand why they include these conditions and I have no complaints. They write with caution. If they don’t provide for all details, tomorrow they may hear blames, “You have sold the country! You are a criminal!” The civil servant needs to protect the interests of the state. He will do so even if nobody gets interested, but no one will blame in giving up the state's interests.
D.P.: What about privatization?
Yu.G: This is a right approach. Something should be sold to the private sector, something – put up for concession. We created concession conditions, and if no one is attracted, we should seek other conditions, find out the opinion of potential investors.
D.P.: Is it possible to sell certain businesses in the Odessa port to the private sector?
Yu.G: I am sure, it is. This huge source will immediately generate funds to the budget, without delaying for 50 years (as is the case with concession - ed.). In this case, the state will not lose anything, as port charges and berth charges will still be paid. What won't be paid? Lease payments. Because they will be prepaid for 10 years at once. I do not understand why the state doesn't want to do this.
D.P.: You own a grain terminal without your own commodity base. Now, large grain traders opt to have their own handling facilities and their own vertical logistics chain. Does it threat your business? Is your partnership with Louis Dreyfus aimed to mitigate this risk?
Yu.G: Yes, this is what we have agreed upon. Louis Dreyfus has 50% in the new terminal. We handle cargoes of this company only. Sometimes when we are asked to handle third party cargoes, we have to obtain a consent from Louis Dreyfus.
D.P.: You have already mentioned your relationship with the state, but nonetheless ... Figuratively speaking, you are surrounded by the sea from one side and by the state—SoEs, the fiscal service, prosecutors, environmentalists—from the other side. How are you coexisting with the state? How many inspections have you had over the past 3 years?
Yu.G: (Laughing - Ed.) It keeps us on our toes. There’s never a dull moment. I've already had different experiences, resulting in a huge file for all kinds of requests... We have survived ‘masked raids’, too.
D.P.: Of those famous Odessa artists from the “Mask Show”, right?
Yu.G: No, not them ... Our female staff were in shock to see the “show” for the first time, remained calmer during the second time, and even offered tea during the third time. A man is a being that gets accustomed to everything, sooner or later. So we have already got used to this to some extent, although we, for the record, are doing our best to work transparently and honestly. But they paint all with the same brush, thinking we are thieves, and they are constantly checking and double-checking us, making evidence-free accusations, etc.
I recall participating in an annual EBRD's meeting in Georgia in 2015 where during my report I quoted Churchill saying, “If you wake up in the morning without a need to drink up 50 g of cognac to calm down, if you don't need a pill to fall asleep, if you don't need another 100 g of cognac to survive this day...”, and there I added, “... if come into your office and see no new subpoena on your desk, if nobody from the prosecutor’s office has contacted in the morning, perhaps, you are doing business not in Ukraine.”
Let's face it, the above is quite typical. In 1992-1993, at the dawn of our business, I asked the authorities, “Why do you pay regular visits to me?” They replied, “Yura, who else? You are the only one who's working.” This means, if you are do something, there is something to check in what you do.
D.P.: When I asked you to tell the history of your business, you started by thanking officials...
Yu.G: In the era of Stalinism, people were shot not only for their mistakes, but also for their inaction. It ultimately shaped the mentality of officials and leaders. All had a feeling ‘I cannot do anything because I will be punished’. Everything has changed; now, the principle is quite the opposite: if I do nothing, I definitely won't be punished. Just imagine that you are doing business and you have no right for mistake. A civil servant or a head of a state-owned company does not have a right for mistake; a mistake can turn him into a state criminal.
Thus, he faces a choice whether to do nothing or do something and become an enemy of the people. At the very beginning, I mentioned that if I were a civil servant, they would have already shot me. For I have lost so much...
D.P.: How do you think the government should support the port industry?
Yu.G: It shouldn't be business to beg the state. It should be just the opposite. Today, the development of business in any area or at a certain stage means that new jobs are created, additional profit, products, and income are obtained. If I take risks, why should I be begging?
It’s not me who should go from office to office, to give bribes. It's not me who should persuade and explain that our projects are good things. Will it bring profit? Let's do it. Will it bring no profit? Just refuse it, but don't waste my time. Let me give an example. Our grain terminal. We launched this project in 2010. It took us 18 months to obtain all documents and permits to start the construction. Meanwhile, we had to pay the rent for the territory, doing nothing on it because it was destroyed.
Finally, we commenced the construction. During the following 18 months, we implemented the three phases of the project. Throughout these three years of construction, we continued to pay the rent, without receiving a single penny of income. In the end, the state failed to fulfill its obligations and did not build a berth for this terminal.
D.P.: You create an impression of a forward-thinking manager, understanding and accepting the Western experience. Do you have any agenda that includes digitalization, electronic document management? I know about the problem of your enterprise – you literally carry “raw stuff” in wagons, use old letterheaded waybills, notebooks...
Yu.G: Here we should distinguish between the two enterprises, Brooklyn-Kiev and Brooklyn-Kiev Port. Brooklyn-Kiev Port created a powerful IT infrastructure, based on CMA's experience. We bought this system. Indeed, our workflow is almost fully computerized. It is based on a single system, linked directly with to the customs house that monitors the process.
Frankly speaking, I certainly agree that many other processes in Brooklyn-Kiev—related to grain and everything else–are also quite automated, but not as much as we would like them to be. I'll put it this way: perhaps, I just didn't have time for that. I would like to complete all current investments to be able to move on to improving our workflow and creating digital documentation. This is a lot of money and it’s worth it. Unfortunately, we have to implement technological processes first in order to proceed with documents.
D.P.: We can state the pent-up demand...
Yu.G: Yes, it definitely exists, it should exist. But, you know, you cannot squeeze all into one stall, into one system. It immediately gives an impression that one person puts others into some boundaries as if he wanted to somehow benefit from the situation. This is what I definitely don’t want.
D.P.: Let us briefly run through this alliance between the railway and the port. The Odessa-Port railway station is a narrow “bottleneck” of the port, operating nearly at ten tenth of its capacity. This throws into question the feasibility of further development of terminal facilities in the port. Is there anything to do about it?
Yu.G: This is the problem of the Odessa port, it's crystal clear. All the stevedores understand it, and so does the Association of Stevedores and Port Operators, where I am the president. German company Deutsche Bahn Consulting was engaged to develop the project. Its experts gave recommendations on how to enhance our technological processes and operating activities. They also pointed out at the need of some reconstructions in the Odessa port, aimed to improve the efficiency of railway transport. This situation is observed not only in the Odessa port; almost all other ports face a similar problem with railway transport.
I have to admit I have no clear understanding of what needs to be done to resolve the situation. But we know what needs to be done for its slight improvement. A breakthrough can be made only by constructing the second approach. Unfortunately today, it is simply unreal for lack of investments.
D.P.: Second approach to the railway station?
Yu.G: The second approach to the Odessa port, from the other side. It is impossible to build it now. A while ago, when construction of the port at the Plant of October Revolution Odessa was discussed, the project of building an approach for railway transport was also considered. With galleries, bridges, intersections on this territory to extend the railway line to the Odessa port. But today the cost of this project makes it unrealistic.
D.P.: What do you think about the opinion that the seaport needs to be moved outside the city, with a marina for boats left in its place?
Yu.G: Actually, everyone wants this. Yes, it's a good idea to build a marina here and to relocate everything that is transported or reloaded out. But, for one thing, it is impossible because a new port costs more than millions or even billions. For the other thing, there are a number of investment companies that have already invested their capital, and stevedoring companies that invest their own funds, which means these funds must be returned to them in case of relocating the port. I don't think anyone will agree to that.
D.P.: Does Brooklyn-Kiev plan to make own investments in expanding railway capacities?
Yu.G: That's right. I can’t say exactly how much, though. This is a trade secret... We have a few pre-project ideas of how we would like to do all this. Considering the fact that Louis Dreyfus has already built 330, it now plans to build another 700 wagons (we are part of this project). Having all these wagons means that, whether you want it or not, you need a repair base, a storage yard and other things for them. With your cars, you won't survive without such development and expansion of railway infrastructure.
D.P.: We have already mentioned PPP. Let's clarify some things about it. The memorandum of the USPA, port, Brooklyn-Kiev Port, CMA on reconstruction of 14Z berths in the Odessa port that will allow the Khlebna harbor to double the throughput of its container terminal. Is it a PPP project?
Yu.G: We wouldn't like it to be PPP. There is one simple reason for that. Unfortunately, we have had a negative experience of constructing a berth together with the state.
Based on the lesson learned, we are ready to provide the necessary funds in full and assume all risks associated with these investments only if we are dead sure that, in this case, the state will receive all this back in 49 years and not earlier. It will be the kicking the can down the road again, and again it will be a very difficult project to implement. It goes without saying that legal mechanisms must be worked out so that tomorrow no one comes and says, “Oh, everything is beautiful here! Why have you stolen the public property?”
D.P.: And what about the law “On concessions?” Do you expect it to facilitate any progress? Or does the current legislation provide for “pilot” projects but there is no common sense or political will to launch them?
Yu.G: As I said before, no matter how good a law, including that on concessions, may be, just one or two tender conditions are enough to kill the project stone dead. Undoubtedly, the existing draft law “On Concessions” needs amending and enhancing so that many of the comments we discussed at the Association of Port Operators are taken into account. Yes, there is some progress with the draft law. But it is not a panacea for all our troubles.
D.P.: Clear. Let's move on to the port economy reform and possible transition to the landlord port model. This model prevails in the world and provides a possibility for a private stevedore to lease land and all necessary port infrastructure, hydraulic equipment from the state. Would you be interested in such a model?
Yu.G: I would. It is a kind of concession allowing the construction of a separate complex by joint efforts, and its further lease with the right to develop and reconstruct it without the infrastructure owner's permission: “Can I invest? Can I make permanent improvements? No? Well, there is nothing to be done... ” We understand what it costs today to get a permission for permanent improvements...
D.P.: Who is your contact person in the Ministry of Infrastructure of Ukraine to discuss industry issues? Does the ministry need a deputy head for maritime transport and ports?
Yu.G: We now have a closer contact with Tkachuk, USPA's local branch manager, with Voitko, Raivis Veckagans and Omelian. These are the four main officials who we communicate with. But we understand full well that everything is not so simple inside the ministry. Implementation of many things that are sound and supported by everyone doesn't go as smoothly as it should.
Considering the above, I believe that if before (in the Soviet Union) we had just a minister of maritime transport, today we need a powerful professional maritime transport minister to be in charge of both maritime and inland water fleets, ports, and factories that remained in the state ownership, and river port points, and many other things. Today it is a little blurry.
D.P.: A separate minister? Or would a deputy minister of infrastructure cope with this challenge?
Yu.G: It could be a deputy minister, but the one narrowly specialized in the maritime and inland water transport.
D.P.: Now that you've mentioned river transport... We are also interested in this area. Some time ago, we prepared a draft law “On inland water transport” for the ministry. There are problems with “bottlenecks”, car access to the port and the railway station... the cargo that is today transported by 40-70 railway wagons or 200 trucks can be loaded onto just one river vessel. Are there any chances to launch a river-sea cargo transportation scheme? A scheme that provides for a river vessel to call at the Odessa port for further transshipment to a sea vessel?
Yu.G: This is definitely an area for improvement. We have once raised this issue. It was about 15-20 years ago. We visited Dnipro city to discuss the acquisition of barges from a shipyard. However, considering the calculated logistics costs, including the cost of passing through gateways, and the fact that the Dnieper, whether you like it or not, freezes over with no navigation for about 4 months, we realized it made no sense.
It is necessary to develop inland water transport, but it is quite costly. Many practices and approaches should be changed... As far as I know, now these changes are expected to be introduced by the law to be adopted (on inland water transport - ed.). As I remember, at that time it was impossible for a foreign flag to enter the river, there was no competition.
D.P.: I bet the competitive environment hasn't changed much as the sector is still regulated by the USSR's inland water transport statutes adopted in the 1950s.
Yu.G: That's right. Today, ship owners don't put much trust in the Ukrainian flag, unfortunately. Many of them prefer to have convenient flags. Why should we pay taxes if there are flags requiring no taxes to be paid? Self-propelled barges or tugs. Why not give them this opportunity?!
D.P.: Let's talk about people and qualified workforce. Are you satisfied with how training is provided in vocational schools and universities today? Do you need to invest in staff training, say, under the principle ‘we provided you with training, you have to work it off’?
Yu.G: Today, lack of qualified staff is a huge problem in Ukraine. It is getting worse. There is a serious labor shortage. We lack drivers, with professional dockers, crane equipment operators. They are leaving to work in ports in Europe, Poland and the Baltic states in particular. Today, they have a real opportunity to earn money. However, their departure is not necessarily related to earnings. European countries promise a completely different life, a different attitude to people, different quality of roads, and different police behavior.
D.P.: Does the employment agreement in your company provide for different kinds of training with a need to work its cost off? To stop trained employees from leaving immediately for Hamburg or Gdansk without working off for you?
Yu.G: No, I wouldn't say so. You have no right to detain a person if he writes a letter of resignation. You can only get a compensation for the money spent from such a person. If he leaves from the salary of UAH 12-13 thousand to earn EUR 1.5-2 thousand, he will immediately pay you the compensation of UAH 4-5 thousand and leave.
Unfortunately, this mechanism doesn't work. There should be a financial, salary mechanism. They should receive adequate money that would ensure a normal standard of living for people here. Until it is so, nothing will keep them in the country.
D.P.: The social infrastructure, too...
Yu.G: Exactly. This should be an integrated approach.
D.P.: You have recently changed your position in the company from CEO to the president. What does it mean? Have you decided to gradually depart from operational management? And does it create a need for a full-fledged corporate governance system and supervisory board?
Yu.G: My changing this position does not mean that I have left. But I think that young people must have growth prospects, they must see themselves progressing. When young professionals reach a high level, routine work may turn into a burden for them, posing a risk that the routine will absorb them, thus hindering their further development. They will continue to work and do their best to fulfill their job duties; however, having no opportunities for progress, they will become less proactive.
Another point to consider is that you as CEO still have to pay a considerable amount of time to operating activities, working with the staff, no matter whether you want it or not. You can’t imagine that plethora of folders with documents are submitted to be signed at an enterprise with over a thousand employees. Here you need to make a choice of where to be engaged, either in strategy development or in operating activities.
Therefore, I decided to some extent separate these functions and gave up operating activities. However, I haven't taken full charge of the strategy development from the CEO.
D.P.: The areas on which you have refocused, including strategy, liaison with external stakeholders, supervision, are classic functions of supervisory boards in developed systems. The supervisory boards are now appearing in large state-owned companies such as UZ, USPA. Do you think large private business will move to the center stage?
Yu.G: It definitely may. For now, I am interested in this work. I love it. I like being a part of some new projects. I like this business rush. Even knowing that some of the projects will never take off the ground, I’m still working on them for myself, perhaps, to fantasize a little. Why not fantasize now and then?
D.P.: You have lived and worked in the UK. Besides, you have a UK based Uroll UK Limited, a sharing agent and forwarder. Great Britain is a leading sea power. What did you learn there? Any new skills that help manage a complex port business?
Yu.G: This isn't an easy question to answer. It wouldn't be right to say that in the UK I learned something extraordinary about the maritime business that I hadn't known or done earlier. In England, I saw a different approach to visioning strategies and developing companies. I believe that it is quite difficult for young professional who received their education in the UK to come to work in Ukraine. It's not because of different knowledge... It's because approaches differ.
For example, in England, you pay hefty taxes, but you can see where they go. It's quite the opposite here: you pay taxes but don't understand how your money is used. Once at a tax conference, I got a question about the difference between these taxation systems. In my reply, I recommended not try to copy the UK tax system. Vain endeavor! We have a different mentality. In England, you pay taxes nine months after the end of the fiscal year. This means that you have to close your balance sheet and pay taxes for the previous year by the first of September. You have nine months to properly prepare all your documents and pay taxes for the previous year by the first of September. During these nine months, it is possible to earn enough both to make further investments and to pay taxes for the previous year. That's not the case in our country where taxes must be paid on a quarterly basis.
This approach has its rationale. If we were allowed to pay nine months after the end of the fiscal year, there is a high likelihood that 60% of companies would just vanish into the thin air. We already have enough indecent taxpayers that are difficult to find. Should they appear in this situation, they will definitely escape.
Visiting England was useful not so much in terms of acquiring specific knowledge about business and maritime transport, but rather in terms of learning fundamental approaches to doing business in general.
D.P.: What are these business qualities?
Yu.G: Establishment of joint ventures with such leading companies as Dreifus, CMA, and ADM is probably the result of the understanding that you can’t pull everything together into one pocket and say, “I am cool!”.
D.P.: Partnership with leaders: their financial resource, their technologies...
Yu.G: Absolutely. These will boost the development of everything.
D.P.: Do you have much free time?
Yu.G: Look, we have been talking for two hours. Today I came to the office at a quarter to seven in the morning, to hold the first meeting. The second meeting was at eight, the third one at half past eight. Then at 9 o’clock I met with banks' representative, followed by the fifth meeting at 10 and the sixth one at 15. Our interview was scheduled for 19.
D.P.: What do you do in your free time when there is such a possibility?
Yu.G: I love playing tennis. I try to make a break at lunchtime and play tennis for about 1.5-2 hours every day. It gives me pleasure. We built a tennis club in Chernomorsk, well equipped, perfectly located, with many tournaments ... one of the best facilities in Ukraine (I'm not boasting). We built a horse club. I used to do some riding but not any more. I don't have enough time. I built a hangar, fly a plane. To be honest, I have made a break in flying, for it was winter. I hope to get there and fly again in the near future.
D.P.: Do you fly planes?!
Yu.G: That's right. I like flying a two-seater airplane.
I love fishing in a boat. I like shooting. Not when hunting (there I can walk around the fields for a quail or duck), but rather trapshooting. It's even more fun.
D.P.: Do you share your hobbies with your business partners?
Yu.G: Yes, they enjoy coming and joining me in these activities. All guys are quite young and proactive. All of them enjoy trapshooting and playing tennis. When in Spain, I really love playing golf. For example, I go to a gym in the morning, then play tennis, then – golf. And the evening comes with a glass of good red wine and Iberian ham... it is impossible to control yourself.
D.P.: Do you fly your guests on a light airplane?
Yu.G: That's right. If you like, I can fly you, too, one day.
D.P.: Thanks! I'll be delighted. If you like, you can also ask me a question.
Yu.G: We have already discussed so many things that I can't imagine in what direction to think. The only thing I want to ask is this. In the West, in the UK in particular, the tax authorities trust Deloitte and its results, and never comes to checks to their clients. Deloitte prepares a report and provides it to the tax authorities, we pay taxes – over almost 30 years of the company's existence, the tax authorities had just one question regarding a contract of one of our partners. Once in 30 years! They invited me for an interview, apologized a thousand times for taking my time, asked a question regarding this contract, I gave my explanation. And that's all. All questions dropped off. But our tax inspection does not trust Deloitte so much.
If Deloitte audited the company or calculated the taxes to be paid, considering the fact that we pay taxes quarterly, what is the point for tax authorities to perform another tax audit? And accrue some far-fetched amounts...
D.P.: This is another complicated issue.
This may not be the case in your particular situation. The reason may not relate to whether the tax authorities trust Deloitte or not. They just may have to comply with a plan that was handed down and that they must implement, even if they think differently.
Globally speaking, in our country lost in a deep distrust of institutions, the state, and each other, it’s difficult to build relationships of trust, especially in fiscal matters.
Besides, we have neither properly established institutions nor trust in them. However, Deloitte, as a leading international consultant, an auditor and a highly reputable accountant, is also, in some sense, a public institution. And I can’t say that the tax authorities demostrate a complete distrust of our company. They listen to and accept our expert opinion on certain matters. Being an international consultant, we make every effort to ensure our high credibility in the eye of business and the state. But we do not claim to possess the ultimate truth either; the state of law should have a law and a court for this purpose. So that we have interinstitutional trust as in England, we should have gone through many centuries of civilizational development. What we really want to do is to work this way up as soon as possible.
Yuri, in your office there is a huge picture depicting port workers. It conveys the strength and character of people. Shall we take a photo against such a diligent company?
This interview contains the respondent's direct speech without curtailments, changes, corrections or retouching; it reflects the respondent’s subjective opinion and may not coincide with the position of Deloitte. Deloitte is not responsible for the information provided.