Investments in ports of Ukraine
Investments is rather a wide concept covering all issues related to commercial transactions beginning from simple credit and ending with complex forms of participation in property and business affairs of a company. A person having free financial or material resources (in-vestor) transfers them to other person (investee) to implement some project in view to obtain benefits. Let’s try to make some assumptions as for the ways through which Ukrainian port enterprises can get an access to foreign financial and material resources to develop their port economy regardless of whether they are state ports or private handling terminals. Port economy means the whole property complex serving to the basic intended purpose of any port, namely, to handle the cargo.
It’s not a secret that the existing system of port economy is to serve interests of the Ukrainian enterprises exporting results of their activity such as raw materials, metal and agricultural products. In this case the only task of the port economy is export reduction in cost and, accor-dingly, there is no any question as for its development or such question may arise in case when it is not able to serve interests of the Ukrainian exporters.
At the same time due to its geographical location the port economy shall sooner rather than later serve not only interests of the Ukrainian export, but the interests of transit. It gives reasonable explanations as for adoption of various state programs for development of Ukraine as a transit country. These programs will remain unrealizable till new understanding comes according to which port economy is an independent and quite profitable type of economic activity, not a subdivision (“work shop”) of Ukrainian enterprises exporters. It is supposed that the global economic slowdown and reduction in Ukrainian export are to speed up that process; however, lack of free and cheap domestic resources for development of port economy shall evitable lead to appeal for investments applications towards foreign financial organizations and private investors.
The only publicly available way to find a foreign investor is a tender that is any proposition to be accepted. Ukrainian legislation instead of the foreign word “tender” in the ab-ovementioned meaning stipulates another foreign word “offer”, while the word “tender” is used in the meaning of public sales related to purchase of goods, works and services for the state money. Hereinafter, to avoid any misunderstandings we shall use the term “commercial offer” in the meaning of proposition for acceptance instead of “tender” that is a well known term in Ukraine.
To receive investments into the port economy any port enterprise is to define a commercial offer the subject of which is an investment project and to inform potential investors about such offer and choose the most acceptable among therm. It does not depend upon the essence of the project: whether it is a construction of a new port or terminal or reconstruction, expansion or modernization of the existing one. One should keep in mind that any investment project is an article of trade and it is a unique article of trade in such sector as port economy that can be sold in any case but the cost can differ greatly. That is why a com-mercial offer to be accepted on the most profitable conditions for the port enterprise should meet specific requirements, namely:
Profitability. A commercial offer is to provide some profits received by the investor, for ex-ample, interests on investment, interests on the share of profits that the port enterprise and investor can share between them or, in the long run, discounts or benefits the investor can decidedly rely upon implementation of the project. Accordingly, the investment project specified in a commercial offer should be profitable in all cases. Even so, the rate of return is to be quite definite and available for the investor even at the stage of the commercial offer receipt. The low rate of return in itself is not an obstacle to receive investments; however, it will require additional guarantees from the port enterprise and will have an influence on investment value.
Cost and term. A commercial offer should contain investment project value expressed in a definite amount of the money need to be spent within a definite term to implement the project. Investor should know that the investment project value is quite definite upon receipt of the commercial offer. If the project value cannot be expressed by a fixed amount by reason of some objective causes, then, the exact criteria are to be indicated according to which the amount shall be calculated. The same is with the terms of the project execution. Uncertainty of the value and term is not an obstacle to receive investments as well, but it influences their value and requires either guarantees or risk taking as for the rise in cost of the project and extensions of terms for its implementation.
Feasibility. A promise of profitability contained in the commercial offer for a definite value within some definite term does not guarantee receipt of investments unless the investor is persuaded in the project feasibility. In this case, feasibility of the project means not real implementation of the project being capable to put it to the tests that are impossible for a port enterprise when drawing up the commercial offer, but a practical possibility to implement the project based on the circumstances known to the port enterprise. Thereby, investor should be informed about all circumstances that somehow may influence implementation of the investment project.
Implementation criteria. Considering that practically each investment project is supposed to be implemented within quite a long period beginning from investment granting and ending with their return together with the promised profits, commercial offer is to contain some specific requirements according to which efficiency of the project shall be controlled. The choice of criteria depends upon the type of the project and can be expressed, for example, in fleet tonnage or volumes of the cargoes handled. However, such criteria are to be strictly defined to avoid any reproaches as for inefficiency and other misunderstandings between investor and port enterprise.
Alongside with the requirements related to the content of commercial offer, we should dwell on the conditions to be met by the port enterprise wishing to receive investments. The con-ditions are general and comprise reasonableness and respectability. If business reputation of the port enterprise is not known to potential future investors received its commercial offer, they are to be provided with the corresponding confirmation. Due diligence report issued by an independent expert is a well-known and quite sufficient document in such cases.
When announcing commercial offer to potential investors and choosing the most acceptable among them one should remember that each serious foreign financial institution takes care of its business reputation. Thus, procedures for commercial offer announcement and choice of the investor are to meet requirements for honesty, openness and clarity. Any uncertainty or ambiguity in choice of the winner even from small number of potential investors that can cause doubts as for honesty or suspect collusion, influences the business reputation of the winner that will withdraw a commercial offer to protect its reputation.
Author: Arthur Nitsevych
The search for the most acceptable investor is rather labour consuming process and requires special skills and experience. That is why quite often commercial offer is entrusted from the very preparation and till signing the investment agreement to specialized organizations having required skills and experience. Due to deep knowledge of international markets of sea and transport services, on the one hand, and new technologies in financing, on the other hand, they successfully consult state and private companies of sea and transport sectors on issues related to perspective development of business and financial transactions all over the world. And, perhaps, Ukraine should not “reinvent the wheel” in organizing tenders and auctions to attract serious investments in port, the only thing to do is to make use of in-ternational experience and practice.