Infrastructure Talks with Serhii Holovko, Chairperson of Supervisory Board of JSSC Ukrrichflot
The Infrastructure Talks were led by Dmytro Pavlenko, Tax & Legal Director, Head of Infrastructure Industry Group at Deloitte Ukraine. This time, Dmytro Pavlenko talked to Serhii Holovko, Chairperson of Supervisory Board of JSSC Ukrrichflot.
Dmytro Pavlenko: The prospects of the Law “On Inland Water Transport” (hereinafter, the IWT Law or the Law) represents the main topic on the river infrastructure agenda today. We first discussed it with you back in 2012 while working on the draft law. However, the river transport infrastructure is still regulated by the Statute on Inland Water Transport of Ukrainian Soviet Socialist Republic (USSR) of 1955.
The IWT draft law has been registered with the Ukrainian Parliament since 2015. The 8th Parliament failed to pass it. On 20 April, the 9th Parliament finally passed the draft law in the first reading. Since then, however, there has been no progress and the draft law is awaiting for the second reading.
I have a number of questions that I would like to ask you.
What is your prediction for when the law will be finally adopted?
It is clear that such a prolonged absence of an important infrastructure law is attributed to the lack of compromise between the main market players and the state. What is your opinion on this situation?
We believe that all stakeholders should be united by one goal – to increase cargo shipping by river. When we started working on the draft law, we expressed our opinion on this matter in the article Routing Cargo Back to the River. This means development of business, new jobs, additional tax revenues, and environment protection. Can these goals be achieved without the law? If not, then why is the law so fundamentally important for increasing the river cargo shipping?
There is corruption everywhere, even at the bottom of the river. The illegal sand mining under the guise of dredging and scandals surrounding “diamond prosecutors”. One of the reform’s versions is to provide a sustainable source of funding for river infrastructure (maintenance of floodgates and other infrastructure, including river depths and navigation routes) by introducing the river charge that will be allocated by the “river administration” to the infrastructure needs through a transparent procurement process instead of awarding contracts to the “privileged” state-owned enterprises. As compared to the previous draft law’s versions that envisaged introduction of a single river charge, the current version proposes creating a special fund of the state budget that will be managed by the IWT executive body. Would this provide the solution?
Serhii Holovko: To answer these questions, first we need to understand what the transport industry is in general and what the river transportation is in particular. If we look at the infrastructure system as a whole, we still consider each infrastructure segment separately, which is absolutely wrong. When we started working on the draft law in 2012, we simultaneously initiated work on interindustry balances. However, it was not supported. If we look at the country as a whole, we need to understand how all the elements are interconnected: the generation of cargo flows, cargo movement throughout the territory, export and import. Then we need to consider all modes of transport and how they are interconnected.
The regulator should have a dedicated tool for cargo flow management. However, speaking about present situation, it looks like the regulator not only fails to manage the cargo flows, but it does not even see them. Thus, it looks like this situation suits not only the regulator itself, but also all the governmental “players” involved. However, this does not suit the private sector. This is when the initiatives, such as the IWT draft law, start to emerge. What does this Law mean to us? It is the path where we would like to define the “boundaries” that would be difficult for the regulator and state-owned enterprises to cross.
Let me explain what I mean. There is this “notable” state-owned enterprise Ukrainian Sea Ports Authority (USPA), which de facto controls all water area of seaports. Our river ports are located either directly in the water areas of seaports or in adjacent areas. Until now, we still do not have clear understanding of what USPA actually is. At the stage of its establishment, it was stated that it would be some kind of the state-owned enterprise, the purpose of which is to create equal conditions for all involved business entities (regardless of what they are called, be it terminal operators or otherwise). There was no goal to cash in on the process. However, with its functions being transformed, today USPA is purely a business entity with the functions of the regulator at the same time. More than that, it is a monopolist.
Do we need the Law? Theoretically, if there are equal and competitive conditions for Ukrainian business entities, including in comparison with other jurisdictions in the Black and Mediterranean Seas, then the law is not that much needed. However, given the current situation, I believe that it is necessary to codify a set of cause and effect relationships to have better understanding of how things work. As far as I am concerned, the law is needed to regulate the relationships between the state-owned companies, the regulators, and private business.
What is the major dispute here? Should a river charge be introduced or not? For us, the river charge has never been a fundamental issue, but a certain framework that defines clear rules for everyone. However, Nibulon saw it differently. They were against the introduction of river charge.
We do not want to pay more than we are paying now. We want to pay less. If we, as a business entity, can have fewer expenses, we will increase our competitiveness. Since all infrastructures are interconnected, it creates discriminatory conditions that undermine our competitiveness.
D.P.: You mean discriminatory conditions for river transport business?
S.H.: Yes, that is right. If we look at the transport infrastructure as a whole, we have railways, roads, rivers, and the sea (we are not taking into account air transport and pipeline transport, though the latter will have the same trends). By sea, we mean import and export; it is a relatively free market. Then there are rivers, roads and railways. Back in 1991, the volume of cargo shipped by Donetsk railway alone, as far as I remember, was almost 1 million tonnes per day, whereas today the whole of Ukraine is shipping just about the same volumes. The cargo flow has been on decline creating an excess capacity, which in turn was plundered, amortized and “dried out”. But in fact, if you consider the economic meaning of this phenomenon, there was a hidden subsidization of some public and private businesses by the railway.
Furthermore, cargo flow and railway capacity curves could not coincide anymore. The cargo structure started to change with the emergence of agrarian cargo that did not have own hubs and clear logistics chain. Consequently, this type of cargo was gravitating towards roads. This has resulted in disequilibrium – more cargoes were transported by roads, there were no road charges, and no one constructed and repaired roads. As a result, the road infrastructure was destroyed.
Almost the same situation happened with the river infrastructure. Since it was consolidated in the hands of business entities and as the river shipping was decreasing, we tried to adapt by cutting down costs and eliminating inefficiencies. We have reached the rock bottom. However, we managed to gradually get back on track. This was achieved not because of the regulator’s policies or measures, but as a result of inevitable process. The regulator does not have the tool to determine the volume of cargo shipped by roads. It can partially see the rail cargo flows because it is a monopolist and partially see the river cargo flows because there are two or three main market players, but it does not see the river as a whole. As a result, our segment started to grow. Inability to provide high-quality rail and road transportation services was the main growth driver. It is necessary to mention that we did not pursue any specific purpose in it – it just happened.
D.P.: In other words, you have achieved growth without the regulator’s assistance. Would the IWT Law help you to consolidate your position?
S.H.: As regards the Law, there are people who are happy with how things are going and there are people like us who are not satisfied with the current situation. These are two fundamentally different approaches.
The shareholders of Ukrrichflot treat this business as their own, and they do not want to lose control at some stage. For example, as a result of taking large leverage (credit funds), which we will be unable to service. At the same time, we understand that we are working within the system of legal relations established in the market, as we as the lack of (interindustry transport) balance, active position of the regulator, and strategy. There should be some strategy at the top level as regards the Ukraine’s position in the global cargo transportation market, what cargo flows will be generated in Ukraine, and what cargo will be shipped in transit. Based on this strategy, the regulator should perform certain tasks using the respective tools. But there is no strategy, no goals, and no tools. Everything happening now is just a chaotic set of actions. For any development to take place in this chaotic environment there should be certain conditions provided.
For example, to build a river-marine vessel that we would be proud of when it enters a European port under the Ukrainian flag, we need about USD 12-15 million. The usual payback period for such an investment (without considering additional country risks) is 7-10 years. However, we do not have the required financing and stable cargo flows to realize this. Another example is infrastructure modernization. But we need to start somewhere.
D.P.: Do you suggest that the uniform and clear rules of the game should be introduced?
S.H.: Yes, and that is why we talk about the Law. First, we need to analyze the river cargo flow and make it transparent. But there are some people who say that everything is quite transparent and clearly reflected in the statistics. When the question about statistics arises, the only relevant answer is that it is not their concern. It is difficult to reach any kind of consensus or resolution since different people are involved in the discussion. Some of them are engaged in illegal sand mining and transportation, while others are involved in illegal cargo transportation or transport cargo legally but do not maintain the required documentation because they pay salaries off the books and pay for the services provided in Ukraine in other jurisdictions. For example, transshipping cargo in Dnipro and paying for transshipment services in other jurisdictions.
We say that the rules should be the same for everyone and that information should be transparent. This is where the debate starts. One group of the market participants is happy with how things are going, the other group does not understand what this all is about since they operate in a very narrow market segment, while the third group – freight owners – are ready to do anything to keep the railway tariffs low. Other freight owners are ready to take any steps necessary to transport freight by roads for free. Everyone has own ideas and suggestions, thus bringing the whole discussion to the boiling point.
That is because there is no uniform state policy that could bring all the processes under a single strategy. As a result, the business cannot reach an agreement because there are different businesses involved – state and private, national and foreign – thus causing insuperable contradictions.
D.P.: This explains why the “river legislation” has not been adopted yet. Is there any chance of reaching a compromise?
S.H.: I believe that the law will be adopted, because everyone understands that some lines should be drawn and that we need to start somewhere. It is wrong to start the whole process from the law, but when there are no other levers of influence the law can drive the required processes forward. It is difficult to determine what the outcome will be. However, I believe that the current government should not only declare its openness to changes, but also show it in practice. As I said, we will have to wait and see. In my opinion, the likelihood that the draft law will be adopted is high.
D.P.: What is your opinion on the current version of the draft law?
S.H.: We believe that it contains a number of discriminatory provisions. We have raised our concern with the MPs, ministry, business entities, and non-governmental organizations. For example, the idea of legalizing sand mining under the guise of dredging is discriminating against all law-abiding subsoil users, including us. The fundamental question is why the MPs, who supposedly understand this issue, believe that it can be regulated by such a law. I think this is ridiculous. Perhaps the sand lobbies are so powerful that they can manipulate the draft laws.
D.P.: Do you mean the sand and concrete lobbies?
S.H.: Yes. In addition, the freight owners are the ones lobbying for engagement of non-residents. However, there is some misunderstanding and lack of judgment on this matter. Many believe that the engagement of foreigners will help us to resolve some internal problems. We already have an experience of appointing non-residents to leadership positions in our companies; a number of criminal cases have already been initiated against some of them in respective jurisdictions. It is just utopian to believe that someone will help us to solve our problems; and we are ready to give our market.
We keep saying that this provision is discriminatory to companies like ours. If we are engaged in domestic shipping activities, we have to pay wages, income tax, related payroll charges and VAT, whereas a foreign company does not pay anything. The legislator does not want to hear us out. Though there are some ideas that it is possible to save money by purchasing an outdated Danube fleet without paying customs dues. But we are ready to accept it believing that it might bring some confusion to the market in the short-term, but in the mid-term it will level off.
D.P.: So, it is quite possible that we can see on the river the so-called “eurobliakhi” (the term used in Ukraine for cars with international registration plates brought from abroad and used without registering such vehicles in Ukraine).
S.H.: These were the main issues. In addition, the legislator plans to strengthen administrative regulation and grant new powers to some regulators. But as I said earlier, if regulators do not have information based on which they can exercise their powers productively, then there is absolutely no point in giving them more authority and control.
Therefore, we believe that to have a set of lines defined at the legislative level is much better than without them, which is the # 1 key point. The key point # 2 – to try raising some issues in the draft law, which later will be easier to assess, give empirically verified judgments, make certain conclusions, and move forward.
D.P.: Our audience also includes foreign businessman and experts. Let us tell them about Ukrrichflot. Ukrrichflot is the largest river shipping company in Ukraine. Here is some information from the company’s website. The company has five largest river ports: Dnipropetrovsk, Zaporizhzhia, Nikopol, Kherson and Mykolaiv. The aggregate annual throughput capacity is 10 million tonnes. Waterfront is 6.4 kilometers in length. The fleet comprises more than 200 self-propelled and non-self-propelled vessels with a dead-weight capacity ranging from 1 to 6 thousand tonnes. Is this correct?
S.H.: In broad terms, the above information is accurate. However, I would like to share some other specifics. Our fleet can be divided into four main types.
The first type includes cargo fleet for shipping hold-stowed cargo (mineral construction materials and certain types of mining and metallurgical cargo). It comprises tugboats and barges making up an essential part of our fleet.
The second type comprises the convention fleet of river-sea navigation vessels. Operation of such vessels is regulated by international conventions. These are typical river-sea vessels ranging from 2 to 5 thousand tonnes (also known as coasters). We have been operating these vessels for quite a long time.
The third type comprises tugboats. We also have shipping fleet comprising barges and tugboats that carry hold-stowed cargo (grain cargo, finished metal products).
The fleet size is not fully illustrative of its actual capacities as it all depends on where the cargo is loaded and unloaded, where it goes, the voyage duration, and other factors. If speaking in numbers, our main fleet comprises open-top barges and tugboats. There is also a very small segment of auxiliary fleet, which we almost do not use after switching to outsourcing such services. We have a small convention fleet. Historically, Ukrrichflot did not have it. This is one of the areas that we plan to develop, in particular, for grain cargo transportation.
These are some fast facts about our fleet. Now some information about our ports and their throughput capacity. The ports were privatized at the early days of the privatization process.
This is also a very interesting issue, which is rather misunderstood today. The ports were privatized as port facilities. Ukrrichflot was privatized separately. It was a shipping company with some elements of infrastructure comprising mainly ship repairing facilities (now we have Zaporizhzhia and Kherson shipyards). During the privatization of ports, the following concept was used: the berths, being the multifunctional infrastructure items, remained in public ownership. The privatization concept implied that such waterside structures will be transferred to the balance of enterprises that acquire river ports for further usage. However, the Cabinet of Ministers has established the River Ports Authority and transferred these structures to them. Now they say that the berths do not belong to us. By ignoring the whole privatization process, they now tell us how these berths should be managed, expecting us to pay for it.
D.P.: By analogy with the seaports?
S.H.: There is no analogy here because river ports were privatized as ports, and not as land plots or separate structures. The ports are supposed to have access to water area. This is not a problem for us since we have everything covered under the servitude agreements. But there are some “hot heads” who throw some ambiguous hints and send us letters saying that they will put some scrap metal on our berths and make us pay more.
As regards the ports, we control the estuary ports in Kherson (on the Dnieper) and Mykolaiv (on the Southern Bug). We also have Nikopol, Dniprorudne, Zaporizhzhia and Dnipro ports, comprising a fairly large coastline. We have a worn out, though still operational cranes.
Talking about the throughput capacity, the figures mentioned above mostly relate to bulk cargo as compared to unitized cargo shipped in big bags, containers or metal products.
In addition, we have two shipyards.
D.P.: What was the volume of cargo transshipped and transported in 2019 and what is the outlook for 2020? What impact the quarantine will have on the company and how are you addressing the related challenges?
S.H.: Cargo shipping has decreased by about 10% compared to 2019. The period from February to April was very challenging and extremely difficult for us. As regards volumes, without mentioning the specific figures, there were about 1.2 million tonnes of sand, 1 million tonnes of metal, about 600-700 thousand tonnes of grain cargo in various combinations, and about 1 million tonnes of unitized cargo, representing the main cargo flow through our infrastructure. There were also some crushed stone and other less significant cargo flows.
As regards transportation, we use open-top barges for domestic shipping of metal, crushed stone, and sand. We also perform some project cargo shipments, though the volume of such shipments has dropped down to zero. We use covered barges for domestic shipping of grain from the central and southern parts of the country to offshore transshipment stations in Mykolaiv region. In addition, we ship metal from Dnipro and Zaporizhzhia to seaports.
As for exports, our direct shipments by conventional fleet include metal produced by Metinvest that we ship from Zaporizhzhia. Last year, we started to ship metal from Mariupol as well. We also ship grain, some ferroalloys and glass flux, which presents rather high capacity utilization.
D.P.: How is cargo transported from Mariupol?
S.H.: It is shipped by rail to Zaporizhzhia and further it goes in compound shipments along with Zaporizhzhia cargo, for example, to Turkey.
D.P.: You said that shipment has dropped by 10%. River transportation, figuratively speaking, has already reached the rock bottom. Do you think there should be some growth stimulus?
S.H.: I do not know. I believe that the downward trend is attributed to several factors. The metal market has slightly declined and then leveled off. The grain market was low due to a substantial drop in the gross yield and poor harvest.
The unitized and imported cargos (in particular, building mixtures, fertilizers and cement) correlate with the overall economy that has declined as a whole.
D.P.: Are you optimistic about the overall situation?
S.H.: I am moderately pessimistic rather than optimistic.
D.P.: Can it get any worse?
S.H.: I believe that it will definitely deteriorate, but how bad it will get is still unclear.
D.P.: The share of river transportation in Ukraine in the total cargo flow is 1%, in Germany – 13% (on average 6-7% in the EU). How is it possible to shift cargo from rail and road to the river?
S.H.: In my own opinion, the underlying issue is that there is no culture of obtaining correct input data. During the Soviet Union period, the input data were collected using a single methodology, but it was destroyed. When collecting data, no one really pays attention to what methodology is used and how the data are collected. Therefore, the resulting calculations may be somewhat irrelevant. When we say that we know for certain the volume of cargo transported by rail, it seems to be true. Since it is one enterprise, by putting together all cargo that the company and its subsidiaries transport by rail, we can determine the total volume of cargo flow.
As regards river transportation, in my opinion, we do not see a substantial portion of cargo flow. For example, we do not see the actual volumes of sand being transported from Kyiv region. If we look at the statistics, there will be figures that are not reflective of the actual situation. We also do not see cargo flows in the estuary regions. I guess the situation in these regions is similar to that with the sand transportation.
Accordingly, it is quite difficult to reliably determine the share of river transportation. Approximately, it is around 1-2%. While import and export volumes can still somehow be correlated and estimated, no one can determine the volume of cargo shipped by road within the country.
How is it supposed to work? Ukraine has a unique geographical position. We need to analyze how Ukraine can benefit from it in terms of the global cargo flows. Furthermore, we need to look at the local cargo flows and develop a certain strategy.
However, to be able to see the local cargo flows, we need to have the interindustry transport balance. After analyzing the transit cargo flows, we can determine some methodology and develop the strategy in order to move forward. As a result, the regulator should manage the cargo flows using the available tools. If the regulator wants to make the roads better, it should implement respective measures. Currently, there is the Big Construction infrastructure project being implemented in Ukraine. This is great, because the country will have roads. Moreover, it will have a positive impact on inland water transport and the real sector. However, if the trucks continue to drive with overload without paying any road charges, if only passenger cars will be paying excise duty, and if import/export trucks will be refueled outside Ukraine, then what is the point of speaking about any roads.
If the strategy prioritizes roads, the cargo should move to rail and inland waterway transport. From this point on, there should be a commercial tool to direct these cargo flows.
For example, densely populated North Rhine-Westphalia in Germany, which is probably the richest part of Europe, represents an intersection of the richest countries – Germany, Benelux, and France. There are road sections where the toll charges are so high that it is better to transport cargo by rail. It will be more cost-efficient than using the road. It is done to reduce the load on infrastructure and insure safer road traffic.
That is why everything should be congruent with a strategy, and if there is not a single one, then this discussion is pointless.
How does it really happen in Ukraine? Let us consider the following example. If to go from Zaporizhzhia to Odesa costs X, by water we can do it at Y. If Y is less than X, and enough is left to get to our port and transship cargo, then cargo is likely to be transported that way. This is how we compete and survive in our Ukrainian reality, where everything is self-adjusted based on one factor only – the price for freight owner. In a more advanced transport model, everything must be adjusted based on many factors. In that case, the railways, rivers and roads will start functioning as one well-organized transportation system.
D.P.: In other words, if there are two factors – on the one hand, the Big Construction and weight control on the roads, and on the other hand, there is an increase in the UZ’s tariffs, the low level of which is much talked about, then...
S.H.: Then the river’s cargo flow will increase dramatically. There are, of course, some infrastructural limitations, and this is, first of all, floodgate capacity. Having performed some analytical research, we have concluded that the river could ship about 35 million tonnes of import/export cargo. There may be some coastal shipping within the country. This is all very important. If today the rail transports 330 million tonnes or maybe even less (it used to be about 350 million tonnes), then theoretically it would be possible to ship 30 million tonnes of cargo by river in a few years’ time. However, it will take some time.
D.P.: You have repeatedly emphasized on the importance of interindustry transport balance and data analysis. I am well familiar with this topic and see the value of data collection and analysis in my legal profession. Do you have any suggestions or comments for the Ministry of Infrastructure that, before regulating and fixing fragmented, disconnected processes, it is necessary to set up a process of data collection on cargo, passengers, transport units, infrastructure, etc.?
S.H.: Absolutely. I believe input data is the key to everything. There are two major aspects of development. The first is to define a general economic strategy with the transport strategy as a part of it. However, it should be based on the second aspect – data collection; not only in infrastructure, but also in other spheres. To make the right decisions based on data, we should pay attention to data collection. If there are no input data, there can be no effective decisions.
Another problem is the constant change of leaders, regardless of their effectiveness – very often, they are replaced within a year.
D.P.: The idea of power alternation is generally misunderstood. What should the regulator’s productive cycle be? How should it align with a big political cycle such as the parliamentary one?
S.H.: We are discussing processes with a 3-5 year horizon. If the team members are being constantly changed and there are no initial data, you will never get a predictable management result. When everything is not properly clarified, some errors can occur.
D.P.: Let us talk a bit more about lawmaking, in particular the draft law on multimodal transportation. A quote from the Minister of Infrastructure: “This law contributes to the environmental protection by redirecting a significant portion of cargo flows from the road to river.” Do you have any comments on that?
S.H.: As a company, we are aware of the fact that we are infrastructurally unprepared for many challenges. Why we are not preparing for them? Firstly, we do not have predictable cargo flows. As I said, they move chaotically.
Secondly, the changes will come, but not as quickly as we would like. At this time, I will not be commenting on this draft law. If you have data and a clear understanding of where you are today, you will take a step to achieve the set goals. One can certainly argue with this opinion, saying that first you need to take a step, even without having such understanding. These are different ways.
D.P.: The Ukrainian climate and navigation. For example, last winter there was no ice on the Dnieper and there was navigation.
S.H.: There was neither ice nor navigation. The Ukrainian climate, navigation, and management is just a disaster. When the winter is warm and there is no ice, there is no navigation either.
D.P.: Why is that so?
S.H.: There are some plans for renovation and repair works. For example, Kaniv floodgate became operational only in late June or in July. Tenders were held and funding was allocated. There are, of course, objective factors that are getting in the way of doing everything quickly and properly. However, I think that the subjective factors prevail.
In addition, there are general issues concerning not only the industry, but our society as a whole. On the one hand, the unavoidability of punishment should be ensured. On the other hand, if you hold a certain position, you are supposed to make decisions. This can be called an “inevitability of decision”. Today, you can be punished for a decision, whereas there is no punishment for not making decisions. In other words, no one takes responsibility or makes decisions.
D.P.: In other words, the warm winter did not help much.
S.H.: No, it did not.
D.P.: So it turns out that the floodgates represent the river industry’s bottleneck.
D.P.: At one time, there was an idea that floodgates should be transferred under control of the power industry. If there are responsible owners, there will be order. Where are floodgates now and where should they be?
S.H.: The floodgates are viewed out of context. The reservoir cascade system and hydroelectric power plants represent a huge infrastructure that we have inherited. If properly managed, it should generate electricity and not interfere with cargo shipping. Probably, it should be owned and maintained by the state.
All the floodgates I have seen are definitely in need of repairing, but there is nothing critical, although my assessment is based on visual appraisal only. It is possible that the whole fuss about the floodgates is just a manipulation in order to constantly demand money from the government. The floodgates are in need of some modernization, but it does not require all the millions and billions of funding widely mentioned.
D.P.: Let us talk about the public-private partnership (PPP). You own, among other things, the Kherson river port. The Kherson seaport has recently been transferred to concession of the tender winner – Risoil. Your ports are very close to each other and located within the city boundaries. What is your opinion about this asset and the new neighbor? What would it be – a new competition, cooperation or business as usual?
S.H.: The Kherson seaport, in itself, is a good asset. It has some nature-induced limitations making it non-competitive with other maritime assets due to a different water draft level. Due to the regulator’s unbalanced approach, it was partially “discriminated”: the port dues in Kherson are the same or even higher than in Mykolayiv, whereas water draft level in Kherson is 7.6 meters, and in Mykolayiv – 10.5 meters. In my view, this approach is wrong.
At first, we were really interested in this asset. However, after considering its limitations and other related issues, we have changed our mind. The port has assets that have to be utilized. Besides, there are 500 employees who have to be paid. After considering all the relevant facts, we came to the conclusion that we neither see any cargo flows in Kherson within the next three years, nor how we could generate them. Therefore, we did not participate in the tendering process.
As regards Risoil, I cannot comment on its plans for the Kherson seaport. We have good-neighborly relations and healthy competition with Risoil.
D.P.: Pilot concessions of seaports were held under previous legislation. Now there is a new Law on Concession that regulates new investments in infrastructure – other ports, ferry crossings, train stations, small railway stations, etc. Are you interested in any other concession projects?
S.H.: Amid the declining cargo flows and excessive stevedoring capacities in ports, this process is rather complicated. The time was lost when new cargo flows were being formed, when the agricultural sector was a strong growth driver, and when there was an opportunity to attract new players. If we take the whole country component at that time, the cargo flow chain from the field to FOB at the seaport, the price per tonne of cargo was USD 50-60. At first, it was USD 25-30 for the sea terminal. Now it is around USD 10. However, the entire cargo flow by rail, road or river was supposed to be within the range of USD 25-30. That was the real situation on the market. The super profits generated by the port stimulated the construction of terminals. However, this was attributed to the lack of a balanced approach. Now, the process is reversed.
In my view, the state has shown itself as an extremely inefficient owner. Everything should be transferred to private economic entities as quickly as possible to reduce the share of state ownership. Whether it is a concession or not, the form should not prevail over the substance of the matter. If we see a growing cargo flow, then there should be a queue; however, when we see a declining cargo flow and a shrinking economy, then this presents a serious challenge.
D.P.: There is an opinion supported by various historical examples: in times of crisis, focus on the infrastructure development, which will serve as a catalyst for the economic growth. Does this hold true for Ukraine in general and the Ukrainian river in particular?
For example, there have been intermittent discussions about the E40 river route. “The route from the Varangians to the Greeks” – a system of canals and rivers from the Baltic to the Black Sea. Currently, this route is only partially navigable. Is there a possibility for implementing this project and how can it benefit the economy? Traditionally, all cargoes in our export-oriented economy are shipped downstream, from the Ukrainian mining and processing plants and fields to the seaports. Are there any options for change in the direction of cargo flows? For example, for cargo that can be transshipped in Kherson for further transportation to Belarus and then to the north?
S.H.: In theory, this process is possible provided that it is included in some global cargo flows that are able to provide funding and support. Some flows from China to Europe, transcontinental flows. As regards local examples, this scenario is not only impossible, but also absurd. There are no such cargo flows neither in Eastern nor in Central Europe.
The statement about building infrastructure is itself correct. The construction of roads is great, but everything should be in context.
As regards the E40 transport corridor, in my opinion, it will be non-viable unless it is part of the global transport traffic.
D.P.: Fleet building as the point of growth. What is the situation in Ukraine? Are you building your own fleet, how difficult is it to build in Ukraine, and does Ukraine need its own strategy here? What can the government do in this sphere?
S.H.: We have already discussed it at the beginning of our conversation. We do not have access to funding, there are no strategies as well as mid-term predictability of cargo flows.
D.P.: What about technology?
S.H.: It is of secondary importance. I believe that Ukraine still has the potential for small shipbuilding. I am not very familiar with the sphere of large shipbuilding. I have seen many shipyards and I can say that we have the required capacities and people. At this point, everything can be revived, and I see an enormous potential here.
A country-specific factor in shipbuilding can be significant and serve as the growth driver. Here again, the shipbuilding cannot exist out of context. It should be based on cargo flows, which, in turn, has to be based on the economy. I have heard more than once the statement about the world’s perception of Ukraine: brains, grains, and hands.
If grain is prioritized as a commodity, then this three-component chain can serve as the growth driver. If we take our traditional mainstream – metallurgical industry and agricultural sector – to start developing these chains we need to reduce imports in these areas, continuously strengthen the country-specific component, increase the processing capacity, and create new cargo flows. The related industries and transport sector should be included in this process. Shipbuilding would also fit well in this structure, since we have our own metal and people. Although we do not like our northern neighbor, not everything it does is wrong. As example, let us look at their shipbuilding industry. They developed a number of programs that allowed for complete fleet renovation. There are plenty of similar examples in different parts of the world.
However, some critics argue that this contradicts some documents signed with the EU. But if it does not contradict common sense, it should be analyzed and implemented. I believe that Ukraine has competitive capacities, engineers, and design offices.
There are few domestic industries that can compete internationally, and shipbuilding is one of them.
D.P.: River as the sphere of passenger transportation. I have some good memories of childhood – Raketa boats that operated like short-distance river taxis. Are there any prospects for the development of passenger transportation by river? For example, from Kyiv to Cherkasy, from Cherkasy to Kremenchuk and further to Dnipro, Zaporizhzhia, Nikopol, and Kherson?
The second topic is the river cruise industry. Weekend boat trips from Kyiv to Kaniv or all-inclusive cruises to the Black Sea, just as comfortable as the Rhine or Nile river cruises. Can this business case theoretically exist?
S.H.: Ukrrichflot used to offer such services in the early 2000s. Though I am convinced that at this stage of human development water transportation is very outdated unless it offers some short river crossing services. Water transport is not as fast and “stable” as a train or a car in terms of weather conditions. Probably, some kind of submarine will be invented tomorrow, but it might not be very eco-friendly.
D.P.: And if it will be powered by a hydrogen-fueled engine?
S.H.: Everything is possible. As regards river cruises, there is no market today.
D.P.: Is this due to the lack of purchasing power?
S.H.: Not in the first place. There is no infrastructure on the river today. There were riverboat stations, floating restaurants and hotels in the former Soviet Union, so theoretically it was possible to take river trips. As of today, all of this has been lost. I am convinced that this infrastructure is primary. It may include public-private partnerships, some large investment projects. If such an infrastructure is created, then it will be possible to sell cruises that are associated with something. Otherwise, what is the point of a cruise itself?
Staying on a bad riverboat will always be less comfortable than in a hotel. We should forget about this for a while.
D.P.: Are Ukrainian rivers involved in intermodal transportation today? Which of your ports are linked with the railway network?
S.H.: The ports in Kherson, Mykolaiv, Dnipropetrovsk and Zaporizhzhia are well connected with railways, whereas there is no railway in Dniprorudne and Nikopol, only port stations. Other Ukrainian ports that are owned by other companies and have connection with the railway network include Cherkasy, Kremenchuk and Kyiv. We have quite a good connection with the railway network.
As for intermodal transportation, we have already been operating a container train for three years. However, this year we are most likely to close down this service. In 2018, we used the Odesa-Dnipropetrovsk container feeder ship and saw the benefits of our Dnipropetrovsk port.
However, it did not work out due to a number of factors, such as the speed, the cargo flow frequency, and the customers’ unpredictability. We failed to create a profitable service. As for container trains, future belongs to them. Although it cannot be said that our container shipping segment, which we have been fighting for over two years, is hopelessly unprofitable, but it does not show the required level of efficiency.
D.P.: It is an interesting fact, because the overall cargo containerization is extremely low in Ukraine. We had a chance to watch the YouTube channel of Ukrrichflot. Though there is only one video available so far, we liked it. It was about container loading. Will you please tell us what types of cargo do you ship in containers and their routes?
S.H.: The main cargo flow comprises export of pipes produced by Interpipe. There were some sporadic grain cargos, but without a stable flow because they are shipped in bulk. Flexitanks are used for carrying oil for export, and building mixtures, household goods – for import.
Why did the container segment fail? It is difficult to scale up due to our location and specifics. In addition, cargo flow is very volatile and fixed costs are very high. When the cargo flow falls below certain parameters, we start losing money. Since we live in a world full of pessimistic scenarios, I do not see any upward trend. Therefore, we will have to either limit this service or stop it.
D.P.: Among the global port industry trends are ecology and environmental protection, as well as the technology advancement (smart ports, etc.). Does it refer to Ukraine as well?
S.H.: I think that very often we underestimate ourselves. Everything can be applied in Ukraine. But there are certain processes that cannot exist separately from the national economy.
D.P.: You mean economy and the level of public awareness?
S.H.: Yes, that is right. There should not be a situation when the port adopts environment-friendly practices while the plant next door completely ignores the environment protection issues. Everything should be coordinated and developed in unison – and then we can expect for positive results. As regards the port itself, everything is simple. It is possible to enhance efficiency of the port within 2-3 years provided there is an adequate level of financial solvency and the regulator’s support. All of this can happen very quickly.
D.P.: Who dictates the environmental standards? Is it a cargo shipper who, by virtue of its policies and positioning, wants to show its environmental awareness, the state or someone else?
S.H.: It is definitely always the state. The community leaving in a specific territory delegates its powers on this matter to the state. But since the state and communities are not ready to contribute to the environmental protection, we can hardly expect a cargo owner to show such commitment at the expense of its profits.
Everyone will be trying to earn as much as the legislation and their moral principles allow them. There should be a compromise: legally, ethically, and profitably.
D.P.: After the hot summer of 2020, I cannot help remembering an annual “watermelon barge” campaign. As far as I know, last year Nibulon occupied this niche and started shipping watermelons to Kyiv. In this regard, I have two questions: what is your relationship with Nibulon and have you had any barges with watermelons this year?
S.H.: We do not ship watermelons. We are not very public-facing company and have no plans of succeeding in this area. Besides, we have a large number of internal issues and tasks that we need to focus on.
Frankly speaking, I have not done an in-depth analysis of the situation with watermelons. It looks like some kind of a PR campaign.
We have almost no relationship with Nibulon. We have a positive attitude towards Nibulon and believe that they deserve respect for what they are doing in Ukraine. We do have different views on certain aspects. In general, Nibulon is a good company.
D.P.: Do you still have different views on the notorious IWT draft law?
S.H.: In some aspects they are different, in others – the same. It is difficult for me to judge Nibulon’s point of view. But they, like us, participate in all discussions and express their opinions.
D.P.: Since you do not ship watermelons, do you transport any exotic or oversize cargo by river?
S.H.: During the reconstruction of the Belarusian oil refinery located in Mozyr, we were engaged in transporting project cargo. We even had to accommodate our barges to perform this task. The cargo arrived on sea vessels. We welded metal structures on barges where this cargo was hoisted on. After this, we used our tugboats to ship cargo to the border, which was then picked up by the Belarusian tugs and transported to the destination point. It was about 3-4 years ago.
We also transported cranes but very rarely, since there is not much being built in Ukraine.
D.P.: You have been the head of the company’s Supervisory Board since 2008. There is very little information about you on the Internet. You are a real industry expert with an extensive knowledge and expertise. Tell us about your professional journey in the infrastructure business.
S.H.: I am not really interested in self-promotion. We have created a team and we are deeply involved in all the processes that we are talking about today. We have devoted a significant part of our lives to this process. We are the supporters of progressive development, since evolutionary development is associated with certain risks. By focusing on achieving rapid growth, you can lose control over some processes. I am very cautious about attracting investors and credit resources. I would not like the intention to quickly reform or develop some processes to jeopardize our business.
After joining the company in 2008, we have been leaving in the state of permanent stagnation – the crises that have been coming in waves, loss of cargo flows, and economic downfall. We live in a mode of constant “struggle” and we are learning something new.
D.P.: What are your plans and goals for the future?
S.H.: We already have an understanding of how to make this company more effective, resilient, and competitive. We have already started on this path. We are fairly small by the global standards, but still large in terms of the number of our assets. Therefore, we have to bureaucratize some processes. We are not as dynamic as some other companies are, but we are gradually moving towards this goal.
D.P.: You are welcome to ask me a question.
S.H.: How do you see the infrastructure in the context of the national economy today and the role of the river in particular?
D.P.: If to use your patterns, the infrastructure should be viewed in the context of the economy in general. We have the commodity-based and export-oriented economy. This means that infrastructure plays a key role in serving this economy. Therefore, I believe that the state should focus its efforts on addressing the issues that we have talked about, in particular, the construction and protection of roads, adoption of competitive port dues, stimulation of river transport and intermodal hubs, including those located on the river. However, the role of the state should not be overestimated; the market should provide its support through PPP and privatization programs. The competitive market is the best regulator.
S.H.: What sectors of the Ukrainian economy, in your opinion, are globally competitive?
D.P.: First of all, it is the agricultural sector.
S.H.: In what sector do you see the growth potential?
D.P.: I would like to talk about high-tech and science-based industries, and high value-added products. We have a considerably strong IT sector; however, its share in GDP is quite small and it is pure outsourcing. In my opinion, all we can talk about today is the agricultural and metallurgical raw materials, low added-value products. If we can thresh our grain and make pasta out of it, it will be another story.
S.H.: To do this, you need to have an access to the market where you can sell it. You can produce anything provided you can sell it – a simple rule of capitalism. Today, Ukraine opens its market to all countries but in return receives no new markets. The idea to develop processing industry is correct, but today it is just utopian because you will need to consider where you are going to sell the output and whether the domestic market is sufficient for it. Import substitution plays an important role here. However, it should be based on the domestic economy and related historical processes. Talking about the river and small shipbuilding sector in the context of our economy, it can provide some economic growth and later serve as a growth driver for the related industries. I believe in a story like this.
Kyiv, October 2020
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.