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Infrastructure Talk with Anastas Kokkin, General Director of SC Odesa Container Terminal
We continue our series of interviews within the framework of the Infrastructure Talks project. This time, Dmytro Pavlenko, Tax & Legal Director, Infrastructure Group Leader at Deloitte Ukraine, talked to Anastas Kokkin, General Director of SC Container Terminal Odessa (“CTO”).
Dmytro Pavlenko: Anastas, you run the largest container terminal in Ukraine. What professional journey in this field led you to the position you hold now?
Anastas Kokkin: My whole career was largely developed in the orbit of the transport and port industry. At first, I was engaged in legal practice and provided legal support to foreign investors, protecting their interests in the matters related to, among others, the maritime law and investments in large ports of Odesa. After that, I spent nearly seven years abroad, working on contract in London and later in Moscow, which greatly enlarged my professional experience. In addition to legal issues and international M&As, I learned the ropes of project management and gained an understanding of the financial sector; I was in charge of different business areas in European and CIS countries. The next milestone on my professional journey in the port business was participation in a project on construction and development of a new container terminal in the Illichivsk port (now, Chornomorsk) in 2005-2009, with Russian investor “National Container Company” as its main shareholder. At that time, it was an outstanding business project stirring up considerable interest in the market. In my role, I had over seven hundred people at my command, which greatly helped me hone my skills of managing a large team. Finally, before joining Container Terminal Odessa three years ago, I had worked in the financial and banking sectors, holding senior managerial positions in two reputable Ukrainian banks.
D.P.: Talking of the Ukrainian seaport infrastructure, what is your vision on the development of the infrastructure of seaports in Ukraine? What do you think should be done to increase their competitiveness and effectiveness?
Anastas Kokkin: Let me focus on just three main factors; though, there are many more things to consider. Firstly, Ukrainian ports should become highly demanded intermodal hubs in the state’s infrastructure. In other words, the state should ensure that the ports have sufficient capacities and that the infrastructure grows faster than the ports to boost their development. Not the other way round! It is anti-productive when port operators work hard on their development and end up with infrastructure problems, having to implore the state to do something about it.
Secondly, we need clear rules of the game, established at the legislative level. Why reinvent a wheel? We can choose and adopt the most acceptable approach from EU directives. We should put every effort in creating acceptable and understandable conditions for foreign investors. Their participation in the port business and development is a key to success of the industry in our developing economy.
The third factor is the most important one. No matter how good the rules of the game are, they will not work, unless the legislation provides for efficient anti-corruption mechanisms.
These are the three pillars of success in this industry.
D.P.: What are the main competitors of Ukrainian seaports today? Ukraine has very high port charges, the highest in the Black Sea, right? The charges were cut down in 2018. How did this affect the cargo handling volumes?
À.Ê.: I will narrow my answer to the container shipping segment as it is our business. Today, import and export are the main cargo flows in all Ukrainian ports and container terminals. Unfortunately, the share of transit is just negligible, although it does have potential in the long run. This brings us to a situation where we have almost no serious competition in import and export cargo traffic. There are small intermodal transport links that can bypass Ukrainian ports and enter others, but they have an extremely small share and very little prospects. In view of the above, Ukrainian container ports compete for import-export cargo traffic only among themselves.
At the same time, the lowering of port charges (they were indeed the highest in the Black Sea) is beneficial for us, for it produces a positive effect not only on the development of ports but on the Ukrainian economy and the cost of the final products.
We know how to for further cut port charges. Given the latest reductions, they will be less critical for the port operations. However, global carriers are more interested in injecting funds in development of their own businesses and expanding the existing facilities. They might consider investing in additional container services only if this expenditure component is at about the same level as that in the ports of Romania, Bulgaria, and Turkey in the first place.
D.P.: You have mentioned transit that is a large area. Do you think Ukraine may carve out a niche in container shipping through Eurasian Transport Corridors?
À.Ê.: It is definitely so. Now, with the railway and highway industries involved, it is hard to say what share ports, including Ukrainian ports, will have in this infrastructure. Combined traffic is quite possible. This is a very promising area. However, right now I would not dare to make any predictions of how it will develop.
As for transit, it has the potential to resume in significant volumes if the country gets its economic development back on track, the Donbas region’s military conflict ends and political restrictions on Russian cargo traffic are lifted.
I remember the year of 2008 when I was developing the Ukrtranscontainer container terminal in the Illichivsk port: the volume of transit cargoes in different directions exceeded 10% of the total cargo flow. That was a considerable share. Needless to say that the main transit was to Russia. We still have certain volumes of cargo transit, mostly destined to Moldova; however, they are not comparable to the share of through traffic to Russia, Belarus and Kazakhstan. This segment in the transit sector opens many doors for us as well. This is where we can compete with Russian ports in the Black Sea.
D.P.: You are a large German investor in Ukraine. What investment risks and prospects do you have on your radar in Ukraine today?
À.Ê.: I would mention a couple of aspects here. Considering the situation in Ukraine, we look not only through the prism of the country’s economic situation and general risks, but as the largest German investor in the port industry of Ukraine, operating in this market for over 18 years, with over EUR 150 million invested in this business. With that said, we assess Ukraine’s overall business risks in as high. We identify two main reasons for that: political risks and implementation of reforms and stage-by-stage integration of Ukraine into the European Union. We remember different contrasting examples: Poland and Bulgaria.
Ukraine has a great potential for economic development. However, the 2008 global crisis and the armed conflict in the Donbas region did not allow the country to exploit this potential. The economics usually develops in sine waves. In Ukraine, the total GDP decline over the past years indicates that there is a great growth potential, especially if negative political factors are removed and the country makes further active effort to implement reforms and move towards the EU.
D.P.: Does it mean that CTO, as a foreign investor, supports Ukraine’s accession to the EU?
À.Ê.: Absolutely. As long as this process is well-thought-out and gradually implemented in line with mitigation of all risks. Of course, Ukraine’s accession to the EU is an ambitious goal, but it is definitely not worth breaking your neck for.
D.P.: In any case, there is no reason why we should not start now to bring our regulatory framework and standards to the level of the EU requirements, within the Association Agreement, so that we get used to working in a European way.
À.Ê.: I completely agree, but nothing should be done in haste. We need to implement directives that can actually work in line with all other laws and practices.
D.P.: What is a modern container market in Ukraine like? What dynamics is observed in this segment?
À.Ê.: To understand the dynamics, it is necessary to keep your finger on the pulse of the statistics. Our analytical insights confirm that Ukraine has a pent-up demand for container traffic.
When it comes to the container business, it is not only the country’s GDP growth and overall economic development that matter. The level of containerization of the cargo traffic in Ukraine is extremely low, not exceeding 1%. It is a negligible indicator against European standards of developed countries. Hence, the gradual containerization of cargo shipping unleashes the potential of container traffic and ensures its much more significant growth than that of the country’s GDP.
Moreover, there were cases of a disproportionate correlation between the geometrically progressing container shipping and the rates of the GDP growth. To illustrate, following a significant decrease after the 2009 crisis, the container traffic soared by 2018, whereas Ukraine’s GDP grew only moderately. This means that there is no direct correlation, and the container business may more powerfully experience, both peaks and valleys. For example, political risks brought about a sharp loss of Russian transit. Thus, while assessing prospects, the extremely low level of containerization in the country should be considered as one of the main factors indicating a huge potential, coupled with positive expectations of gradual implementation of reforms and strengthening of the economy. We can similarly talk about the country risk assessment: fairly large emerging markets always have high risks and offer lucrative business opportunities.
D.P.: High risks – high rewards.
À.Ê.: Exactly. This is why we, as the largest and specialized German investor in the transport infrastructure of Ukraine, believe in further development of the container business in Ukraine, despite high risks existing in this market. Our confidence is primarily based on the 18-year successful CTO operations that involved investments of over EUR 150 million, and on the fact that Ukraine has a huge export potential. Professional and active development of exports combined with economic reforms may bring to a surge in purchasing power, encouraging, in turn, an increase in imports.
D.P.: What cargo turnover do you have today?
À.Ê.: Over the recent years, the cargo traffic through our terminal has been growing at approximately the same rate as the entire container market of Ukraine, which allows us to maintain and strengthen our leading position in the market. 2019 witnessed up to 20% growth year on year. This might seem very easy to achieve. In fact, it is quite the opposite. Given a fierce competition in the market and the fact that we do not depend on one or more clients that are global container shipping companies, unlike most of our competitors, the terminal has to vie for each container, proving that we are the best by our daily effort and constant improvement of our service. To prove my point, I will give one illustrative example. At the beginning of 2018, MAERSK switched its cargo flow from our terminal to our competitors in the Yuzhny port. In our cargo traffic, its share exceeded 12%, which was substantial. Nevertheless, due to a wider range of opportunities we offered our established clients as well as to attraction of new clients, including THE ONE and YANG MING, we managed in the end to ensure a significant increase in the cargo traffic of SC CTO that amounted to 338 thousand TEU in 2018, up by 15.7% as compared with 2017.
D.P.: One TEU container (an equivalent of a 20-foot container)... Could you explain to uninformed readers how large it is? How much would it be if expressed in, say, beer cases, washing machines or in anything else simple / understandable?
À.Ê.: Well, you can put 80 200-liter barrels of sunflower-seed oil or almost a thousand PCs into a twenty-foot container. Or you can load four cars in a forty-foot container.
D.P.: Are we discussing a single “container shipping and handling market” or are these two different interconnected shipping market and handling market?
À.Ê.: These are very close areas; however, they are two completely different business segments in the same market. The container shipping market is driven by the leading ocean shipping companies – global container shipping lines. As a rule, they regard terminal business just as an important link in a larger supply chain and as expenditure. Many of them have already entered into this business segment and are joining the chain. Sometimes, this may produce a partially negative effect because, in our view, the market of the terminal handling should be as independent from the clients as possible. It should develop in a healthy competitive environment that forces its participants to ensure the high quality service provided to clients.
D.P.: As we understand now, these are two segments of the same market. Also, you have mentioned examples where cargo handling and cargo shipping are combined into a single chain by one player. You do only handling now. Do you have any plans to integrate all segments into a chain? As current trend, some large agricultural traders are developing their own handling facilities, building their own vertically integrated structures, and getting independent from stevedores.
À.Ê.: According to the strategy of our parent company, we have several business segments that are successful and to be further developed. The first to mention are port container terminals. Then, there is an intermodal segment served by the most powerful private railway carrier in Europe – Metrans, our sister company. Our logistics business, including general cargo handling, provides transportation through ports and offers clients comprehensive logistics solutions. Indeed, connection and further development are possible when we talk, for example, about the intermodal service that the group already provides at the highest level throughout Europe.
D.P.: But only in the European Union.
À.Ê.: Yes, for the time being. However, we have certain plans for expansion.
D.P.: Let’s move on to discuss your strategy in Ukraine? What are the growth points?
À.Ê.: There are several major growth points. Now, in partnership with the state, we are nearing the completion of our joint project—Quarantine Pier in the Odesa port—involving long-term government-approved agreements, and public-private partnership. The container terminal development project, as approved until 2044, provides for a maximum total throughput of 1.2 million TEU (equivalent to 20-pound container) per year. If the project yields positive results and its opportunities outweigh its risks, we will increase this volume. Specifically, our container terminal in the Odesa port has great prospects for increasing its throughput capacity.
Another growth point is our position in Ukraine. In the port container terminal segment, the HHLA group is one of the most powerful companies both in Europe and in the world. Inasmuch as it is possible in Ukraine, we do our best to keep up with the world trends and comply with German standards of productivity, reliability, vessel maintenance and container handling services, IT technologies, as well as environmental and other international business standards. These are the main pillars of the highly professional service that our clients—global container shipping lines—are used to. Large Ukrainian forwarders are also advanced businessmen; therefore, they embrace all our innovations that meet the global trends. Our strategic goals are to implement European and world know-how in our market and, despite tough competitive environment, to keep and strengthen our leading position in Ukraine in terms of cargo traffic and service quality, still being an independent container terminal with public access for clients. All mentioned above distinguishes us from our competitors in the Ukrainian market.
D.P.: European Service in Ukraine – this sounds encouraging.
À.Ê.: We want to introduce our know-how into intermodal services related to rail shipping in the Ukrainian market. However, to this day, our operations have been restricted to the territory of our terminal and shipping only through UZ.
This refers to container block trains launched in 2018, with regular routes. It was our first step. Intermodal services, fixed-route transportation and container delivery, own fleet of container platforms and, in the long run, even locomotives and others can further be introduced in railway terminals inside the country at production and consumption points. All of the above is what our sister company has in Germany and it works very successfully throughout Europe. In Ukraine, these capabilities are just contemplated about, but we have already put this matter into our strategy – to actively develop this area in the short and medium run.
So far, we are in need of the legislative rules of the game mentioned above. However, despite this, we can spot more chances in this area in Ukraine than risks. First of all, we can see positive changes within UZ, specifically: a new supervisory board, top management is making efforts to increase transparency, fight corruption, and harmonize operating rules. The time frames and tasks are not easy; in this respect, UZ is subjected to severe criticism mostly by those who is not interested in such drastic changes. In our view, there are some tactical mistakes; with that, we support UZ in their endeavors.
D.P.: What is the ideal picture of your intermodal service in Ukraine of the future? Your client brings cargo to your railway station, you load it into a container on your rail car towed by your locomotive and deliver it to your terminal in the port where you transship it to the container shipping line, right?
À.Ê.: Inside the country, there are points of import delivery and points of export shipment. We see this process as follows: a vessel brings a container into our terminal where this container is handled and forwarded to the railways. The full range of intermodal services is provided on the entire route from the loading point at the terminal to the point of the final recipient at the request of the container shipping line or forwarder. It includes the railway tariff for shipping to a certain end station, plus handling the container at the railway terminal inside the country, and all related service if requested, such as breaking up the train, stuffing, stripping, freight insurance, container depot for empty containers, and the so-called last mile delivery within 50-200 km from this station to various locations in this area. These are the above cargo delivery end points, making up all together the classic “intermodal” service.
D.P.: What are your main competitors in Ukraine?
À.Ê.: Today, the container port market suffers from serious overcapacity, i.e. an excess of throughput capacity (handling port capacities). The throughput capacity exceeds the actual cargo traffic enormously, approximately by 3 times, including both operating terminals and idle terminals that almost ready for operation. The second category includes the terminal that I built in the Illichivsk port some time ago, when I was the general director of "Ukrtranscontainer". It has Berths 3-4, as well as Berths 5 and 6 with rear territories and container handling equipment. Although it does not handle containers now, only grain and other cargoes, it has a significant throughput capacity for the container market. This project attracted the attention of the world leading company Hutchison, and it even made its calculation and planned to start a business in Ukraine. Though, we couldn’t grasp what objective economic prerequisites they had considered, given the mentioned overcapacity in the market. With annual growth of cargo traffic, the overcapacity will definitely decrease, but hardly will we reach any balance between supply and demand for at least another 7-10 years. However, they shelved this idea because of the election year and some other factors. Nevertheless, the capacities are still in their place, ready to start operation at any moment.
The foregoing determines a dense competitive environment in the market of port container terminals in Ukraine. Today, there are four major players. We, Odesa Container Terminal, are Number One, immediately followed by Brooklyn-Kiev Port company located also in the Odesa port. As you can see, the Odesa port concentrated the largest part of container traffic in the market. Therefore, there are many logistic and intermodal ties there. The third company to be mentioned here is private TIS terminal in the Yuzhny with a rather large throughput capacity. And the fourth player is a private terminal in Illichivsk located in the Fishing Port. It has a limited throughput capacity and it is more focused on container traffic that historically goes through the Chornomorsk port; therefore, it put much less competitive pressure on our company.
Medium-size terminals with small cargo traffic make aggressive efforts to vie cargo traffic by offering significantly lowered prices; and they sometimes succeed. I cannot tell what resources they use, for these companies are in private ownership and, thus, they do not make their information publicly available. Sure, their prices are slightly lower than ours are. However, we rely on our highest level of service, reliability, our advanced technologies and publicity.
We ensure the fastest handling of fleet, which is very important for container shipping lines as any vessel idleness doesn’t come cheap.
In addition, CTO has sufficient handling capacities, both at berth and rear territories. Therefore, even despite the current system of so-called “berth windows”, in the vast majority of cases, we are able to ensure berthing upon arrival—a unique approach in the Ukrainian market—and to accept and handle container ships of all our clients immediately upon arrival, without waiting and queues.
D.P.: Does it mean that there is no waiting at the roadstead?
À.Ê.: Yes, that’s right. We have a window fleet handling schedule. The operation of the terminal depends on weather conditions and the number of vessels arriving at the same time. However, commissioning of the new territories at the Quarantine Pier allowed us to provide all our clients with berthing upon arrival almost all the year round, which is also in many respects due to well-arranged work and professionalism of our team.
Of course, this became possible thanks to sound German investments and support by our partner – the state of Ukraine represented by the USPA that built the quay. In our turn, we created the necessary infrastructure: we used the funds invested to reclaim 19 hectares of land, purchased container handlers and other necessary equipment. While the rear territories are being built in this zone, we handle and store containers on the sites of the so-called old terminal, which we lease from the State Property Fund and the USPA until 2044.
D.P.: Why did Maersk leave you?
À.Ê.: We see two main reasons. Maersk is a leader in the global shipping market, which allows it to always demand some exclusive conditions. For example, the lowest price for port terminal service. To attract such a big fish, you need to offer a price that will be significantly lower than the average market prices in Odesa market. The second important factor in cooperation with Maersk is the opportunity to develop their own exclusive container trains used by them to ensure “door-to-door” deliveries for their large customers - cargo owners.
It should be a regular exclusive container train: it is not for public use, meaning that it is not a public service, and it is not accessible for other market participants. Almost all our container trains are for common use, i.e. they are intended for general use by all interested market participants. This means that every line, every forwarder can order transportation on any train. All processes are coordinated by UZ and the information is published on our website. This is a very understandable approach and a completely transparent business, available to any market participant. Specifically, today there are regular routes: weekly departures of block trains on Odesa-Kyiv-Odesa, Odesa-Kharkiv-Odesa, and Odesa-Dnipro-Odesa routes. There is one more special regular train, it runs to Ivano-Frankivsk, comes to the station Rozhniativ. It is a train for a large export manufacturer. It brings empty containers there, takes away loaded containers that are then exported by sea from our terminal. This particular route is outside interests of other market participants.
This approach is one of our advantages because we have no dependence on any container shipping line or forwarder, and we provide all clients with equal conditions and opportunities, which maintains a healthy competitive environment between market participants.
To encourage the attraction of container traffic, we correlate our pricing policy with the actual traffic of our clients’ cargoes. We objectively take into account the possibilities of our clients to attract container traffic to our terminal. This means that, if there is actual statistics and proved increase in cargo traffic, we can discuss various reasonable discounts to our basic public tariffs upon reaching the cargo traffic growth stated by the clients. As you can see, in the Ukrainian market we are today the only general use terminal with public service. The second container terminal in the Odesa port—Brooklyn-Kiev Port—mostly belongs to and operates for the global container shipping line CMA CGM. It is an example of a combination of the two segments we talked about earlier.
D.P.: Do you mean to say that TIS was able to give Maersk the desired exclusive conditions? You cannot give them because you have a different approach, you are a common user terminal, you have the same level of service and prices for everyone.
À.Ê.: Perhaps this is so because it is our market approach to unified standards of the service available to all customers and to the market price range without any exclusive terms. We cannot offer a price substantially below the level applicable to a certain annual cargo traffic volume to a client who does not give significantly more container cargo to be handled by the terminal during the calendar year than other large clients do, even if this client is a world market leader. Everything should be even-handed and market-driven. A company may ask for a discount from us only if it attracts a considerable cargo traffic; in this case, a discount may be given in accordance with our market-driven tariff policy.
D.P.: Let’s move on to discuss the linkage between the railway and ports. You told about container trains from the Odesa port to Ivano-Frankivsk, Kharkov, Kyiv, and Dnipro. Does CTO provide intermodal shipping services to its clients? What prospects does this service have, considering the use of block trains in the Odesa port?
À.Ê.: Unfortunately, we do not provide a full range of intermodal services as a container terminal; however, this issue is high on our agenda for the near future. As I have already mentioned, we are doing some preparatory works, monitoring the market, waiting for the development of legislation and establishment of new rules of the game for all clients in the market.
D.P.: Do you mean the law on railway transport that will, among other things, provide for private traction?
À.Ê.: This law, as well. Though, even if you adopt ten good laws without providing proper tools to implement them and without fighting corruption, then a year after implementation, the attitude to these laws and public consciousness may decline in a year. The reforms will not live up to any expectations.
As for block train, we are currently providing this service together with UZ; cargo shipping and other services at domestic terminals in Ukraine are performed by Liski, subsidiary of UZ. We are taking actions to improve this service.
D.P.: Can you explain in simple terms what a block train is.
À.Ê.: This is a regular container train, i.e. a fixed route in a specific direction, that runs on average once or several times a week. It has a fixed schedule for delivering containers on railway platforms from point A to point B, where cargo traffic is handled. For example, the Odesa-Dnipro-Odesa train does not stop at any stations along the way, it goes straight to the destination point and back, with a guaranteed time of delivering the container to its destination.
D.P.: Can a block train be called a land analog of the sea container line service?
À.Ê.: That is a good question. I believe such comparison is conditionally possible with respect to regular railway service. The line in fact provides regular maritime service. Supposing, we need to deliver a container from a port in China to a destination point in Kyiv or in the Odesa port. In the first case, it is also possible to use the railway and a regular train service and / or truck, whereas only a sea route is available in the second case. A combined cargo delivery by the shipping line to the destination point in Kyiv is actually a door-to-door service. It is difficult to compare in this case, as these are the segments of the same chain.
D.P.: Does it mean that the block train schedule should coincide with the sea container line schedule?
À.Ê.: Not necessarily, because not all cargoes must be delivered urgently. Some cargoes can wait at the terminal for several days. When containers are transported on block trains, CTO provides technological storage service without any extra costs to absolutely all clients. We want to stimulate the development of this area, thus helping the state. After all, this allows a tremendous cost and time reduction in using platforms, maintenance of which is quite expensive. In addition, this is a way to save on direct transit – a considerably smaller number of locomotives and brigades that change along the route. It is an example of where private business and the state create the synergy that became possible not only due to our technological effectiveness, but also to the transparency ensured by UZ. Furthermore, this type of railway service encourages carriers to opt for railway shipping more as an alternative to road shipping that is currently prevailing in the market; this significantly reduces the load on our roads and is more environmentally friendly.
D.P.: In fact, it is some practical form of PPP. How does each party contribute in this type of partnership?
À.Ê.: In this case, the PPP has a confederate structure in which there are two separate participants who coordinate their actions to achieve their common goal. The terminal provides timely and efficient handling of container cargo traffic, and platforms necessary for sending and accepting trains. We receive feedbacks; therefore, we know that CTO’s clients are satisfied with our service. Although work of the state partner can and should be significantly improved.
D.P.: Is it only Ukrzaliznytsia that makes decisions on launching a block train on a specific route, or do you take part in this process?
À.Ê.: It is made upon consultation and in coordination with us. However, at this stage, the general process of rail transportation is managed by UZ.
D.P.: Does a block train that runs from Dnipro, Kyiv or any other city to your terminal have to go through the Odesa-Port railway station? It is the port’s bottleneck today because the station is operating at its full throughput capacity. In this regard, the further development of terminal capacities in the Odesa port is doubtful. What to do with the station? What is the position of the key stakeholders of the Odesa port?
À.Ê.: It is a big question. Now the station is capable of effectively handling the cargo traffic that passes through it; only peak grain seasons cause difficulties. I also expect it to cope with its volumes in the coming years, but it definitely requires modernization and expansion to enable further development of port capacities and increased cargo traffic at Odesa-Port.
Last year we engaged Deutsche Bahn Consulting. According to their report, there are a number of measures (including the ones we have recently taken with respect to block trains) to increase the throughput capacity of the station without expanding its territory and considerable investments in additional railway lines. We brought these results to the notice of the management of UZ, the USPA, and the Association of Stevedores of the Odesa port, and received their overwhelming support.
In addition, not long ago a commission (working group) consisting of the port stakeholders was established to study practical issues related to the implementation of the measures we have been recommended. The Association of stevedores nominated me to head this commission to represent the interests of private stevedoring business and work jointly with specialists from the Odesa port and UZ to achieve results.
However, until this is properly in place, there are many ways to improve efficiency and increase the station’s throughput capacity right now. While innovations are being implemented, the normal development of growing cargo traffic can be ensured by even insignificant investments.
Routing of container shipping of 4-5 block trains per week has already increased our throughput capacity. We have reduced transit time and carry out all cargo handling operations in-house, at our terminal, and the train is marshaled at the station. The volume of railway cargo handling and the percentage of railway shipping have significantly increased, almost to 28% of the total cargo traffic. And this result is only for the last year.
D.P.: We have earlier mentioned possible investments in the railway infrastructure of the Odesa port. Do you as a private investor consider such investment? Or will you wait for the law?
À.Ê.: We will hold off on global investments for now. Meanwhile, we will carry out the necessary analytics; after all, it concerns our core business. And yet even so, the Supervisory Board and the Board of Directors of CTO have already approved a new important investment project. In addition, we are heavily supported by UZ and the Odesa port. We expect to obtain all necessary permits for the new project this year, and we will start investing next year. In particular, we intend to quickly build two additional railway lines at our terminal in order to double the terminal’s ability to handle containers on railway transport. Thus, the block-train shipping, which are much more efficient than regular individual dispatches, will gain momentum; thus, we will increase the throughput capacity of the container segment at the station.
D.P.: How much do you consider investing?
À.Ê.: For the time being, it is about $ 1 million for the new project. In the future, we want to invest in more serious infrastructure projects related to railway transport. However, now it is too early for me to disclose all our plans. In addition, we are banking on the support from the state and, possibly, credit funds from European and world financial institutions. We cannot now talk about specific amounts because the commission is just starting to work.
D.P.: What areas will the commission you head focus on?
À.Ê.: The commission will be engaged in the development of the station and improving the efficiency of railway cargo handling in the Odesa port. It will be responsible for infrastructural, managerial, administrative, and technological issues.
D.P.: Are you going to combine this role with your main job?
À.Ê.: Once my boss, the president of the company, heard this idea, he said I had no other choice but to head this commission, and other stevedores also voted for my nomination. Of course, it will take a lot of my working time but we have a strong management team that will keep their fingers on the pulse of all current affairs to back me up if need be.
D.P.: You are a businessman and you probably have tight deadlines. When can we meet up again and talk about the results of this commission?
À.Ê.: We need rational conclusions and practical recommendations to be made this year. This is what should be done first thing, without delay. There are no significant obstacles on our way, since all the stakeholders are interested in changes; albeit, formalities can actually take more time.
D.P.: Can the decisions made by the commission this year lay the foundation for elaboration by UZ, ASPU, and possibly MIU, of a new program for development of the Odesa-Port railway station?
À.Ê.: This is exactly what Deutsche Bahn Consulting recommends doing. Actually, this is our common goal.
D.P.: What new cargo handling segments has CTO set about and what makes the company diversify its activities? What cargo handling volumes does CTO target at in 2021?
À.Ê.: Quarantine Mole—our investment project—is evolving in several directions. Construction of the infrastructure sometimes proceeds at a faster pace. We also have overcapacity of the berth frontage, meaning that our berths allow the handling of twice as much cargoes as now. Capacities of our storage area are great but we need more. Therefore, we continue to build warehouses to achieve the throughput demanded by the market and confirmed by the annual growth of container cargo traffic.
We have potential for development and keep up with the market, despite the fact that we have not yet reached the pre-crisis level of 2008 in terms of cargo turnover. By 2021, we are determined to exceed the so coveted figure of 0.5 million TEU. Our core business is container handling. But why not take advantage of the overcapacity due to the relevant implementation stages of the approved investment project, and increase the current operating efficiency of our assets? We have all needed for that, in particular, high-tech equipment and qualified personnel. Many employees have been with CTO for over 10-15 years. Among them are both dockers, drivers, tallymen, and the managerial staff. We have a close-knit team of professionals who can deal with tough challenges.
Today we have at least two types of diversification. In a separate development from but in no way to the detriment of our container business, we are trying to make our parent company’s investments more efficient, thus providing additional income and attractiveness of our business to clients.
The first area we have diversified into is oversized heavy cargoes delivered by conventional vessels. In Ukraine, for example, drilling rigs for oil and gas production are now in great demand in the market. They are brought into Ukraine almost every month; it is a very highly profitable business. This segment does not interfere with our container business; however, the volumes are such that we need to buy some additional equipment so that we can reduce the use of container equipment for this type of cargoes. In addition, last year we handled the equipment of a mobile asphalt plant that was supplied to Ukravtodor, as well as large-sized lifting equipment.
The second area is grain; we have been in this segment for more than a year. Here arises the issue of competitiveness of—not us but rather our neighbors—grain terminals in the Odesa port that have a relatively shallow depth at the berths. The Yuzhny port and the Chornomorsk port have deeper berths. With limitations of the Bosporus, deep waters are not essential for the container business today, as well as in the near future. However, this requirement is crucial for grain terminals. In the grain market, the most demanded and used grain ships are Panamax vessels that can carry 50-75 thousand tons of grain cargoes. The maximum load of such vessels requires significantly deeper waters than those at berths of the grain terminals in the Odesa port. Therefore, in some cases, we are like a golden share for them.
For instance, they load a vessel up to 50-55 thousand tons at their berth, and then tow it to our berths where they are able to top off the vessel to avoid the so-called dead freight. This is how we cooperate. Big money is at stake as it is a very competitive segment. We already provide this service; however, we have neither warehousing and elevator capacities nor loading machines at the terminal, since we are not a grain terminal.
How does this happen? We allow the top-off of grain vessels, using special containers provided by an innovative Ukrainian company that has a patent for them. In fact, these are standard 20-foot marine containers with a very important feature – automatic bottom opening. It take STS cranes 10-12 seconds to unload such containers just by pouring all grain right into the hold of a grain ship.
Grain ships are loaded at the terminal of our neighbors. After that, ships move to our container berths and grain cargoes in special containers are transported by trucks inside the port. By the way, we have new powerful trucks that can transport two fully loaded 20-foot containers. And our cranes at the new berths of the Quarantine Mole operate using a twin lift spreader. When a truck delivers two 20-foot loaded containers, they are simultaneously captured by the spreader, raised by the crane and brought to the hold of the grain ship. After that, our docker presses a remote control button, the container bottom flaps open and up to 50 tons of grain are loaded into the hold in 12 seconds.
D.P.: This sounds even beautiful.
À.Ê.: In addition, from the ecological point of view, this technology is environmentally friendly: during the handling process, there is practically no spill or dust because the container opens only inside the hold of the ship.
D.P.: Does Brooklyn-Kiev Port use this technology?
À.Ê.: No, they have a slightly different technology. They also handle two containers at a time, but their containers have side opening, and grain is unloaded in a different manner. So, our technology is truly unique in its kind.
D.P.: In Odesa, everyone knows about the notorious breakwater that cost the state half a billion hryvnias and drowned in the port. Only few are aware of this fact in Kyiv. Why did your breakwater drown?
À.Ê.: This is a hydraulic facility aimed to protect the berths and the terminal on the Quarantine Mole. According to the port’s official data, it happened through the fault of designers who had made a mistake in the structure design, construction stages, and consideration of the specifics of the land on which this structure was constructed in the sea. It resulted in a partial deformation, and 185 meters of the construction went under water. It is clearly stipulated both in the contract and in the approved resolution of the Cabinet of Ministers that the construction of a protective breakwater is the responsibility of the state represented by the USPA. Being a foreign investor, we can only observe, ask questions, obtain information, and that’s all. This is within purview of the Ukrainian side, and we, unfortunately, were not in a position to influence the situation.
This is a classic example of the country’s risks that we have already talked about. On the other hand, here we see a chance to eliminate this risk and, in cooperation with our partners, to resolve the situation in a reliable and safe way once and forever. At least I hope so.
D.P.: Without this breakwater, are your berths actually in the open sea?
À.Ê.: Yes, but in terms of fleet handling, things are not quite that bad. Today, weather conditions stop us from using these new berths only two-three weeks a year. On such days, we relocate the vessels to the old berth in the closed dock near our terminal that we rent from the state. Whereas last year we handled 40% of all container cargo traffic at the new berths unprotected by the breakwater, this year we do expect this volume to grow to almost 50%. However, in the medium term, with the cargo traffic and the size of container ships significantly increasing, it is extremely important for us to successfully complete the construction of the breakwater.
As for other advantages, our new assets enable us to simultaneously handle two container ships, without queues and vessel idleness. We handle one vessel at the new berths and another – at the old ones. This procedure of handling fleet already accounts for up to 25% of the terminal’s total operation time. It is a challenging task for us but we successfully cope with it thanks to our team of professionals and a systematic approach to our work.
Needless to say that the security of our assets is one of our top concerns. Especially after the better part of the breakwater went under water as a consequence of an anomalously strong storm in October 2016 – a force majeure circumstance that was confirmed by our lawyers in the Chamber of Commerce. Apart from that, the storm damaged our southern bank protection. We had to take remedial measures to repair and restore this structure, with loss compensation from the international reinsurance club.
D.P.: Don’t you want to recharge your idle time to the state? After all, now you have to lease a berth due to destruction of the breakwater.
À.Ê.: At the moment, we do not have full legal grounds to recover any losses. The thing is that the cranes we bought and installed on the new berths are intended for handling larger container ships. We can handle Bosporus-Max vessels with a capacity of about 10,000 TEU. To date, we do not have such large container ships but we hope that things will change in the near future; the state will fulfill its obligations with respect to the breakwater and, in 2021-2022, we will have these large vessels to handle at the new berths of the Quarantine Mole.
D.P.: The government says that construction of a new breakwater is under their control. How do you estimate the time for its completion? You also mentioned that the German government was ready to provide Ukraine with a special-purpose loan to complete this construction. What amount are we talking about?
À.Ê.: This issue is still under discussion, including at the government level. We are partly involved in this process. Germany has confirmed its intentions and is ready to allocate from EUR 60 million for development of the infrastructure in Ukraine, including the completion of the breakwater construction as a part of the so-called “chancellor’s loan”.
However, it is not the only possibility to implement this project, since the Ukrainian side is also evaluating its capabilities and resources. Naturally, they depend on the financial plan, strategies, the amount of dividends and profit that USPA will be required to pay to the budget. If charges reach 90%, they need to start now and take practical steps to raise a loan. In this case, all we can do is to help to keep the situation under control and to make sure that these issues are not delayed.
D.P.: We talked about the linkage between block trains and container lines, about the waiting of some containers in the port. Are you investing in new container storage facilities? How much will the average storage time decrease and how will this affect the handling profit margin?
À.Ê.: It will have no effect at all. Now, with growing cargo traffic, regardless of the number of free capacities and time frames, the average storage time of imports and exports sharply increases in peak seasons. Thus, there are so-called “jams” at the terminal due to the impossibility of simultaneous storage of so numerous containers. Over the past years, we have been growing on a stable basis, which causes certain difficulties with placing containers at the terminal in the peak season, as it was last year. In view of the above, we decided to invest in developing capacities, partially outstripping the market demand. This measure will help us maintain our level of service by providing us with a reasonable safety bag in case of an unexpected surge in the cargo traffic. It also enables our customers—the global container lines—to quickly and confidently develop their business in the Ukrainian market.
Last year, experts predicted 8-10% growth in Ukraine, but it actually reached almost 17%, and nearly 16% at our terminal. Significant growth is also expected this year and in the coming years; therefore, we are bringing the throughput capacity of our rear territories for container storage and handling in line with the current capabilities of the berth frontage.
D.P.: Container handling rates are falling. Do you think they will continue to go down?
À.Ê.: Yes, within reasonable limits. In 2014, when the state regulation and the tariff book were abolished, thus resulting in free rates, the market began to dictate conditions. Hence, the rates are gradually going down, especially when some competitors use low-price segments and mechanisms. Now, the rates have become lower than in powerful European countries but they still remain higher than in some developing countries. It is difficult to say how the trend will unfold but we think that a slight gradual decrease is possible in the future.
D.P.: Do you believe in the PPP?
À.Ê.: As we do in Odesa, I will answer your question with a question. Will we have the same conditions as before? Will there be clear laws and practical tools for its implementation? Will they fight corruption? If yes, I believe.
D.P.: You use the future tense. And what is the situation today?
À.Ê.: Some steps have already been made; however, their implementation is extremely slow. On the other hand, how can I not believe in the PPP if, for 17 years, CTO has been generating profit both to the state and to the foreign investor that continues to invest its funds. We are developing our business, we have good results, and our trust in the PPP model is based not only on future expectations but also on successful practical experience.
D.P.: Look, if you are already in the PPP today, what is your opinion about the new Law on Concessions?
À.Ê.: We need this law provided that it is clear, transparent, and excluding any possibility for corruption.
D.P.: Does the adopted law meet these requirements?
À.Ê.: For the most part, the law does. Today, a high agenda issue is the implementation of a transparent and painless mechanism enabling investors—the ones who have legitimately invested a lot of funds in this facility and who have created many benefits for the state as part of their challenging yet implementable PPP practice—a transition from lease to concession without tendering. The transition should be transparent, without insinuations, ensuring that, on the one hand, businessmen with sticky fingers are filtered out of the pool of investors and deprived of the right to participate in the tender procedure and that, on the other hand, officials have no tools for corruption. At the same time, it should not harm those who have defended their interests for many years, made tremendous investments and effort, helped the state of Ukraine to develop its transport infrastructure, paid hefty taxes to the country’s budget, as we have, for example.
D.P.: Do you take any interest in pilot concession projects in the Olvia and Kherson ports?
À.Ê.: Do you mean our possible participation? Oh, no. Although, we are interested to see how these projects will work in Ukraine.
D.P.: In addition to concessions, we are looking forward to the port business reform, the transition to the global “port-landlord” model that will allow private stevedores to lease land and all necessary port infrastructure from the state. Would you like this to happen?
À.Ê.: How can we resist the global trend? We ourselves are its representatives, and we have these tools in place in our Hamburg port. However, it’s important not to get caught up in minor things, so as not to break the neck on the way. We can simply copy-paste the EU directive, without taking into consideration the specifics of the Ukrainian market, fight with corruption, necessary tools and practical aspects of its implementation, and treat it as a panacea from all troubles. It will never be so. It is very dangerous.
D.P.: Are you interested in privatization of the port?
À.Ê.: From a strategical perspective, no, we are not. If you mean the whole port... Albeit, any port business in the world considers the option of privatizing certain port assets.
D.P.: Is it fair to say that an investor would like to have a range of opportunities and choose between lease, the PPP model, or privatization? Depending on how these formats compete with each other.
À.Ê.: Definitely yes. However, should we try to implement all of these forms at once, and offer foreign investors their combination, I’m afraid, it won’t work out. But we need to start moving.
D.P.: Do you suffer from staff shortages and competition for labor force? Do your workers leave to work in your port of Hamburg?
À.Ê.: The problem of understaffing exists in the market; however, it almost does not affect us, since ÑTO has the highest salary in this segment and a strong collective agreement that has recently been recognized as the best in the industry – the above speaks for high social standards adopted in the company. We closely cooperate with the trade union, have open and clear communication with our personnel. Employees feel stability, which is why there are not so many people who leave our company, and mainly for personal reasons. However, when it comes to hiring additional personnel, it has become much more difficult to find qualified employees.
D.P.: In Germany, river shipping is well developed. One river vessel can be loaded with 40-70 rail cars. Are you looking into this area?
À.Ê.: We find it interesting because it can produce good synergy between the container and marine terminal and river deliveries, both in import and export. Still, it’s difficult to say anything specific about it now, since we do not operate in this segment of the market in Ukraine; and we are not main drivers in these process.
We are always open for cooperation. For example, Ukrrichflot had a service that successfully operated on our terminal. Further development does not depend on us, but rather on players of the river shipping market.
D.P.: Can a container be loaded onto a ship in Kyiv river port and delivered by the same ship to Odesa without transshipment?
À.Ê.: Yes, such transportation is carried out. However, I cannot tell how effective such delivery is in terms of configuration and speed, and the overall logistics of the process. We do not physically operate in this segment.
D.P.: Do you have digitalization on your agenda?
À.Ê.: Yes, of course. Our greatest initiative in this area is the implementation of a large-scale modern program that will, among other things, ensure a stage-by-stage transition to electronic document management based on CTO’s new advanced webportal for all our clients.
D.P.: You have worked in the UK. Could you tell more about this experience? What skills you acquired there help you manage such a complicated business?
À.Ê.: It was an exciting experience. In Britain, I came to realize how international structures work, what management principles and project management approaches they have, what synergy opportunities exist for developing economies of the CIS countries.
D.P.: What did you learn in Germany?
À.Ê.: I’m still learning. The German people are very nice to work with for their discipline and predictability.
D.P.: What interests do you have in life other than the port?
À.Ê.: That is a good question. Our work is our way but the main thing in life is my family. I take every opportunity to spend holidays and any foreign trips with my family, my wife, my son, and my daughter. We travel to new exciting countries, have good rest and collect impressions. These are probably the most pleasant moments; and it is not only and not so much as money that you put in them, but rather your soul. As a reward, you enjoy yourself and gain energy for further work. I try to do sports on a regular basis. Albeit, now it is more like physical exercises just to keep fit.
D.P.: What you dream-place? A place you have always dreamed to visit but never had a chance yet?
D.P.: Anastas, thank you for answering all these questions. Now it is your turn to ask questions.
À.Ê.: Being one of the Big Four firms, how do you estimate prospects for Ukraine, considering its European integration vector of development? Do you think we will take the path of Poland or, say, Bulgaria?
D.P.: Can you give any fundamental differences between the paths of these two countries?
À.Ê.: I can see a radically different effect and result. It is impoverishment of the population, significantly lower interest of foreign investors, and stagnation of the economy in Bulgaria. Whereas the Polish economy is much stronger, despite the fact that both countries joined the EU at about the same time.
D.P.: Are the EU investments in these countries comparable? I’m just not aware of the figures. And I will also answer you with a question.
À.Ê.: As far as I know, Poland had much more private investments, including foreign ones. I can’t say for sure how large investments the EU countries have made in Poland but I suspect that the amount is incomparably larger than that in Bulgaria.
D.P.: Perhaps, it was due to the geopolitical position, disruptive reforms, and the mentality of people in Poland.
À.Ê.: According to my German colleagues who work with the Poles, they almost overcome corruption at the low and medium level during the past 18-20 years. They have clear laws that promote business and economic development. It was a long way full of hardships but the Poles achieved their goal.
D.P.: I would like our way to the EU, as a way to civilization, to be permanent and smart. Becoming Europe is possible without joining the EU. Civilization may be brought here by implementing effective legislation, law enforcement practice, new business standards, healthy market competition, and so on.
The Association Agreement with the EU is a key document on this path because it requires the implementation of 350 EU directives and regulations. If Ukraine puts at least some of them into practice, it will to some extent guarantee that we have already reached the point of no return.
À.Ê.: Do we have a chance to find our own way, not following Poland?
D.P.: I am an optimist and believe in the best scenario. It doesn’t have to be a Polish scenario. Once labor migration washed young employable population away from Poland, they left for Western Europe. Now this vacuum is being filled, including by the Ukrainians. Now we need to think of how to fill our own vacuum, how to fight for our own citizens who seek better-paid work and leave for other countries. Anyway, I have no illusions that someone will make our lives better for us and for me personally. I believe that it is only us, you and me, who can achieve this result by working hard.