Soon the Saeima will pass in the final reading the legislative draft on the Law on Ports, which has been under discussions for a long time. As a result of the proposed amendments the sea port of Riga and sea port of Ventspils will become capital companies.
The Law on Ports is nearing the «finish line». Nevertheless, although the Ministry of Transport has taken into account recommendations from port-based businesses, many things remain unclear.
Latvian Stevedoring Company Association council member and Baltic Association – Transport and Logistics (BATL) board chairman Ivars Landmanis explains which topics require resolving.
-Many an obstacle have been overcome this year to push amendments to the Law on Ports. The result is clear – the Ministry of Transport has listened to at least some opinions of businessmen. There are even plans to form a special cooperation council for sea port development to assist with discussion and resolution of different topics. How would your describe the new management model for Riga and Ventspils sea ports and just how much of the opinions of businesses have been taken into account? After all, they know this sector inside out like no other.
-Latvian Stevedoring Company Association has had productive cooperation with the Ministry of Transport when it comes to amendments to the Law on Ports. We participated in multiple meetings of the ministry. We presented our proposals, and several of them were taken into account. Still, there is nothing so good than cannot be made even better.
For example, we welcome the inclusion of a section regarding the creation of the Cooperation Council in the Law on Ports. This will allow port users and other interested sides to participate in sea port development. However, this council only has advisory functions. Entrepreneurs would like to have wider authority when it comes to making decisions on topics related to sea port development. I remain confident it is only possible to accomplish good results in the development of Latvia’s largest sea ports if monitoring and supervisory functions are performed by an equal team of state, sea port enterprises and municipal representatives –
the so-called «six-eye principle».
People have to understand that entrepreneurs are responsible for their business and the people working for them and, by extension, their families. The volume of taxes paid to the state and municipalities is also highly important.
Amendments to the Law on Ports will bring considerable changes to Riga and Ventspils sea ports as soon as next year. These sea ports will become capital companies in which, according to the current redaction of the law, 60% of shares would go to the state and the most municipalities would own is 40%. At the same time, there is no approved agreement with municipal administrations on this. This means there is a lack of clarity on the future management model.
-Why is that? Everything seems clear – Liepaja Special Economic Zone will retain its status until the end of 2035. Riga and Ventspils sea ports will become capital companies the majority of shares in which will be owned by the state.
It’s not that simple. We may come to a situation when sea ports in Latvia get four management principles: Liepaja SEZ as it was – it remaining a special economic zone. Sea port of Riga, which I’ve already mentioned, lacks comprehensive clarity if the proposed distribution of shares between the state and municipalities remains 60:40 or if it could change again. The situation is even more unclear when it comes to Ventspils.
So far this municipality has insisted on 50:50. The state is against this, however.
The Ministry of Transport and Ventspils City Council continue discussions. The latter has mentioned, among other things, that the ministry’s proposal for the city’s participation in Ventspils sea port capital company has too little information. For instance, there is too little information if Ventspils City Council is even able to participate in this capital company, which is not a good sign. First of all, this is bad because port-based companies already have many different affairs that need to be coordinated with Ventspils City Council. Not including the municipality in sea port management would create a number of problems.
If no agreement with Venstspils City Council is reached, there is a risk of Ventspils sea port being 100% owned by the state. Latvia has seven smaller ports whose management model will not be changed. As a result, Latvian sea ports may fall under four different monitoring and management models.
-Let’s go back to Ventspils. Can this municipality come out and simply say: we want no part in this?
The current redaction of the law provides for capital shares being owned by the state and municipalities. However, municipalities also have the right to not invest in sea ports. In this case 100% of Ventspils sea port would be owned by the state. The Saeima will soon start reviewing the law in the third reading, but there still is no clarity for the management model in Ventspils.
This situation is unacceptable for entrepreneurs.
There is also no clarity as to sea port territory. The reason is because a lot of it is currently owned by the municipality. Special work groups composed by the Ministry of Transport and Ventspils municipality are working on that. We have yet to witness any results, unfortunately. At least entrepreneurs have yet to hear of any. I’m sure you’d agree it’s important to know which territories are to remain with the freeport and which are not.
-Is at least clear what could theoretically happen with municipal property within the territory of the Freeport of Ventspils?
The city council wants its properties back. But even here there is a severe lack of clarity. As it is known, in January this year Ventspils City Council decided to request a return of all city real estate once handed to the Freeport of Ventspils and the Ministry of Environment Protection and Regional Development asked the city council to cancel this decision because real estate located within sea port territory is covered by the Law on Ports. The Cabinet of Ministers, not the municipality, has the authority to decide on sea port borders. It is likely there will be trials over this.
-So then which is it: if sea port infrastructure is located on territories owned by the municipality and this infrastructure is needed to ship loading and unloading and similar sea port operations, can the municipality simply take all of that back? Isn’t there a solution that would allow for replacing one piece of property for another?
It would be logical to sit at the discussion table and agree on replacing real estate properties with others. Discussions on this topic surface from time to time. The city council has announced plans to develop industrial territories on its own and demands the freeport hand over the land. I believe it is only normal, but the biggest problem is the lack of clarity – what the city takes back and what will the sea port’s territory be like? Still, the review of the Law on Ports progresses in the Saeima.
-Previously, businessmen mentioned on multiple occasions that it would be unacceptable for the new capital companies to engage in business activities, as this would distort competition. What about now?
These capital companies will not be allowed to engaged in stevedoring services and interfere in this business.
However, considering there coverage of the law is rather wide as to what freeports will be able to do commerce-wise, concerns about potential competition risks remain.
When capital companies and private businesses exist in the same segment, such a risk exists always.
-But perhaps the newly formed capital companies in Riga and Ventspils will be permitted participation in such sectors for common benefits and to ensure continued sea port development?
Artificially created risks for competition have never been and will never be beneficial. As for the economic evaluation of the sea port reform, all I can say is that there is none. Entrepreneurs have said on multiple occasions that a comprehensive and modern sea port reform requires a proper economic evaluation, an attractive investment attraction mechanism and prevention of all competition violation risks. The risks for stevedoring services have been prevented, but there are others.
Additionally, many Saeima deputies have mentioned the lack of economic evaluation and that it remains unclear how this reform will benefit Latvia.
An evaluation is needed not because we need another stack of documents, but rather to understand where we are going and what we want to accomplish.
-Then there is the «money issue». Sea ports have taken large loans for development, and now it might turn out that the legal person that took those loans may cease to exist. What do you think: will banks deal with this?
Yes, this issue, too, remains largely unclear. For example, the new capital company may take over loan commitments, but there is no clarity if anyone has talked about this with financial institutions. How will banks react? Will they maintain current conditions and perform re-calculation of loans in accordance with interest rates outlined in the Commercial Law and there by increase costs of capital companies? Considering the geopolitical situation, the sanctions that impact freight turnover, the financial situation at the sea port of Ventspils is far from ideal.
In the end, additional costs could be applied to sea port businesses.
-Then if banks decide to demand immediate return of loans, the situation could turn out very bad financially?
If a sea port has no money and the state does not invest, the commercial structure may end up in a very unfortunate situation – down to bankruptcy. This is the worst possible outcome. But what will happen with pledged strategic properties owned by the state and municipalities?
-Well the situation is unlikely to deteriorate that far. After all, last year the state invested more than EUR 32 million into VAS Latvijas dzelzceļš from budget funds. So there is reason to hope the state might help sea ports if the share in capital companies reaches 60% to 100%, correct?.
Since the state has assisted state owned companies like Latvijas dzelzceļš and national airline airBaltic, whose base capital received investments of EUR 250 million in 2020 and another EUR 90 million this year, then, considering sanctions and the geopolitical situation, we should hope the state will also help sea ports and port-based businesses. I would like to remind that Ventspils sea port suffered the biggest decline after Russian and Belarusian freights left.
But sea port infrastructure needs to be maintained even in such circumstances, which requires a lot of investments. We hope the state will invest in restoration.
For example, the berths in Ventspils are in poor state. Audits have been performed. However, we only have as much money as we have, and we don’t have enough to invest in repairs of berths. I would rather not wait for the moment when ships are unable to dock due to poor state of infrastructure. It would be logical for the state to invest in property in which it owns 60% of shares. This happens in other countries. We hope the new model will help secure investments into base capital of capital companies and help reorganize the economy.
-Then the main unclear issues are related to the lack of economic evaluation, the involvement of the municipal administration in sea port management and city property, involvement of new capital companies in commercial activities and possible consequences from that, as well as the financial aspect and port loans, correct? Is there any thing else?
There are enough topics that demand discussions. However, I have to say cooperation has been productive between the Ministry of Transport and Latvian Stevedoring Company Association so far. As for the issues in need of immediate resolution, one of them is contract re-approval. How will the new capital companies take over existing contracts sea port and business contracts? What will happen to land lease and other issues? Will the new contracts include any new requirements (expected freight turnover, etc.). It would make sense if the Cabinet of Ministers developed rules to govern this transition period, as well as present comprehensive regulations for the liquidation of Freeport of Riga authority and Freeport of Ventspils authority.
It is also important to include a section in regulations that would clearly outline the mutual rights and duties of sea port service providers and sea port authorities.
Unfortunately, we know nothing about development of any such regulations in the Cabinet of Ministers. As a result, we may end up in a situation when the new capital association presents entrepreneurs a contract that includes various impossible requirements and says – either you sign this, or leave! The minister says contracts should be transferred 1:1, but what is written in the new law is open to interpretations. If we look at other topics, law amendments mention that if it is about taking over duties and commitments, re-signing contracts is the way to go with entrepreneurs. I would ask – is there anyone at all who would want to study the situation of each individual business and sign contracts in a way that balances the interests of the sea port and the entrepreneur?
-Indeed, a double-edged sword of sorts. Because right now there isn’t a long queue of businessmen standing outside the doors of freeport authorities. On top of that, it is unlikely we will see one once the new capital companies have been formed…
Yes, there is no such queue. If entrepreneurs want to enter this segment, they need to purchase an existing company.
-So what would be the solution in this case?
It’s simple. If there is a way for sides to reach an agreement and improve existing contracts, they can re-sign contracts, but if not, they should arrange everything from the ground up. This way potential risks will be terminated during the negotiation process and all sea port businesses will be treated equally.
-The current geopolitical situation is what it is. Russia focuses on its own sea ports, sanctions against Belarus keep escalating and freight volumes continue dropping… Is there a way out? Re-focussing on domestic freights, perhaps? Industrial parks? But even so – these things are not done quickly…
Generally in this case as well is there we need to hope for support from the state. We need different programmes that would allow the country’s domestic economy to work and develop. This includes exporting locally made goods to foreign countries. We also need state aid programmes that would help sea port-based entrepreneurs re-orient their business. There is room for «smart re-industrialisation» instead of transit, but even here we need to ask if there is sufficient economic evaluation and how this could affect the future development of Latvian sea ports.
In the end, we need accurate estimates how «changing course» would affect sea port employees and their families.
Too much is unknown here.
BATL chairman: businessmen are responsible for their business and the people working for them
