Information Memorandum Olvia Port Concession Project
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Information Memorandum Olvia Port Concession Project September 2018 1 Table of Contents Chapter 1. General information and a brief summary of the Project 6 1.1 Introduction 6 1.1.1 Outline of the Information Memorandum 8 Chapter 2. Overview of the market environment 9 2.1 Summary 9 2.2 Part A: Ukrainian Port Sector Analysis 9 2.2.1 Historical analysis of the cargo flow of the port industry in Ukraine 9 2.2.2 National Demand and Capacity Projections Most Promising Cargo Commodities 21 2.2.3 Supply Chain Cost Analysis 40 2.3 Part B: SE SC Olvia Projections 54 2.3.1 Introduction 55 2.3.2 Grain Projections 55 2.3.3 Ferrous Metals Projections 61 2.3.4 “Other” Cargoes Projections 66 2.3.5 Conclusions Demand Projections Port of Olvia 71 2.4 Part C: Market Sounding - Potential Investors 73 2.4.1 Introduction 73 2.4.2 Context 73 2.4.3 Main outcomes of the market sounding meetings 75 Chapter 3. Legal aspects of the Project 76 3.1 Overview of laws, decrees, regulations and other legal instruments that are related to the Project 76 3.1.1 Seaport industry laws and regulations 76 3.1.1 PPP/concession laws and regulations 78 3.1.3 Dedicated laws/regulations governing specific aspects/relations under the Projects 81 3.1.4 Overview of concession project flow 83 3.2 The selection of the PPP model, its effectiveness from the legal standpoint 87 3.2.1 Concession 87 3.3 Concession object 90 3.3.1 Concession object under Ukrainian law 90 3.3.2 Comments on land issues 93 3.4 Comments on permit documents and approvals that may be required to implement the Projects 97 3.4.1 Permit documents and approvals that may need to be "transferred" to investors 98 3.4.2 Permit documents and approvals that may need to be received by private partners due to their investment activities and other Project-specific operations 107 3.5 Comments on insurance terms for the Projects 110 3.5.1 Key types of insurance relevant for implementation of the Projects 110 Chapter 4. Overview of existing port property and technical aspects of the Project 115 4.1 Technical solution and transfer of assets 115 4.1.1 Review of the existing port property and condition 115 4.1.2 Investment Requirements 122 4.1.3 Investments in the new grain terminal 125 Chapter 5. Financial Statements 131 Chapter 6. Preliminary Assessment of Ecological Impact 138 6.1 Conclusion of the Environmental Impact Assessment 138 6.2 Preliminary environmental and social assessment of the Concession project 139 6.3 Development scenarios 139 6.3.1 Environmental and social aspects 140 2 Chapter 7. Social Consequences of the Project 150 7.1 Overview of the labor market in the city of Mykolaiv and the Mykolaiv region 150 7.2 Labor Force Analysis 150 7.3 Conclusions 152 3 Abbreviations BDLK Buzhsko-Dnipro Lyman Channel m meter BOT Build-Operate-Transfer m2 Meter squared CAGR Compound Annual Growth Rate МВА Megavolt-ampere ca. circa, approximately WACC Weighted average cost of capital capex Capital expenditure MIU Ministry of Infrastructure of Ukraine CPI Consumer price index МW megawatt DBN State building regulations NPV Net present value EBRD European Bank for Reconstruction and Development No. number etc. Et cetera- so on and so forth O&M Operations and maintenance EUR European currency opex Operating expenses EY Ernst&Young PJSC Joint-stock company FS Feasibility study PPP Public-private partnership ha hectare PSC Private sector comparator HR Human resources psc. pieces HTS hydrotechnical structure Q quarter IMF International Monetary Fund Rо-Rо Roll-on / roll-off IFI International Finance Institution SE State enterprise IFC International Finance Corporation SC Stevedoring company IRR Internal Rate of Return SPZ Sanitary protection zone IT Informational Technology t. tonne inv. No Inventory number TS Transformer substation JICA Japan International Cooperation Agency VAT Value added tax km kilometer UAH Ukrainian hryvnia KPI key performance indicator USD United States Dollar KSCP Kherson Sea Commercial Port USPA Ukrainian Sea Port Administration kW kilowatt UZ Ukrzaliznytsia kV Kilovolt LDC Louis Dreyfus Company LED light-emitting diode LLC Limited liability company 4 Important message This document contains information about State Enterprise SC Olvia. This document is intended for the exclusive use of the parties potentially interested in participating in the tender for the transfer into concession of the assets of State Enterprise SC Olvia. This document is circulated for the sole purpose of acting as a starting point for discussing the project with potential investors. The document should not be considered exhaustive and does not provide full information about the project. This document is not binding and is not legally enforceable. No party will have any grounds whatsoever for any claims against the Ministry of Infrastructure of Ukraine, the Ukrainian Sea Ports Authority, EBRD or IFC, or any other person distributing this document, based on its content. 5 Chapter 1. General information and summary of the Project 1.1 Introduction State Enterprise “Stevedoring Company Olvia" (hereinafter, SE SC Olvia) is a stevedoring company geographically situated on the left bank of the Bugsko-Dniprovsky Estuary in the North Black Sea Coast. Olvia is located in the Mykolaiv region and is one of a number of public and private terminals that form the Specialized Sea Port Olvia (hereinafter, Port of Olvia). The Port of Olvia handles a range of commodities, but increasingly the operators in the Port have concentrated on two “focus” commodities—grains and construction materials—which accounted for over 80 percent of its total cargo volume in 2017 (Table Error! No text of specified style in document..1). Table Error! No text of specified style in document..1: Port of Olvia Volumes and Market Share of the Focus Commodities (2012-2017) 2012 - Thousand Tons 2012 2013 2014 2015 2016 2017 CAGR 2017 % Total Cargo - Olvia 6,037 5,567 6,975 6,911 6,539 6,880 2.65% 13.96% Oil - Olvia 143 39 - - - - -100.0% -100.0% Coal - Olvia 422 491 846 335 65 35 -39.28% -91.75% Different ore - Olvia - 31 25 - - - N/A N/A Construction - Olvia - - 741 1,386 1,741 2,159 N/A N/A Grains - Olvia 1,204 1,643 2,242 2,445 3,046 3,316 22.46% 175.37% Ferrous metals - all - Olvia 2,018 1,374 1,559 1,301 740 224 -35.57% -88.90% Share - Focus Cargoes - 62.72% 64.28% 77.60% 79.10% 85.52% 83.34% N/A N/A Olvia Olvia - Market Shares Oil - Olvia 3.81% 1.13% - - - - N/A N/A Coal - Olvia 3.43% 3.84% 6.83% 3.69% 1.07% 0.32% N/A N/A Different ore - Olvia - 0.09% 0.07% - - - N/A N/A Construction - Olvia - - 20.31% 29.09% 42.57% 36.79% N/A N/A Grains - Olvia 4.38% 6.05% 6.68% 6.52% 7.55% 8.16% N/A N/A Ferrous metals - Olvia 10.75% 7.76% 8.26% 7.14% 4.44% 1.51% N/A N/A SC – Olvia Handled Volumes N/A 1,843 2,411 2,450 2,213 2,510 8.03% 36.18% SC – Olvia % Port of Olvia N/A 33.11% 34.57% 35.45% 33.85% 36.48% N/A N/A 6 Source: USPA; Market Analysis Report Volumes of handled cargo include volumes handled by Nika-Tera and PJSC Okean (effective as of 01.03.2018 ASPU data on volumes of handled cargo no longer include Mykolayiv Shipbuilding Plant Okean and Nika-Tera) Due to the ongoing conflict in the coal-rich regions of Donbass, SE SC Olvia, like other port operators, has suffered a significant reduction in coal volumes. Furthermore, one of the main steel producers opened up a new facility in Yuzhny Port which resulted in the transfer of cargo from the Port of Olvia to the port pf Yuzhny. However, in addition to absolute decline in coal trade, the Port of Olvia in recent years has suffered a reduction in its market share of the coal volumes that still are shipped from the region. Competitive challenges have also resulted in the Port of Olvia losing the ferrous metals trade, falling from about 10 percent of the regional market share in 2012 to about 1.5 percent in 2017. The above decline in volumes has been largely offset by the growth of grain and construction material exports. However, the Port of Olvia is facing increasing competition from the emerging private ports, particularly in grain exports. SE SC Olvia has increased the share of total volumes it handles at the Port of Olvia from 33.1% in 2013 to 36.5% in 2017. In cargo volumes, it increased its operations by 36.2% in the same period of time. In 2017, SE SC Olvia generated post-tax operating free cash flow (available for re-investment and/or distribution to the government as dividend) of 127 million UAH. The enterprise paid almost UAH 92 million of dividends to the state budget. SE SC Olvia’s ability to compete with the regional private operators will thus define its future success. The overall grain production in Ukraine is expected to significantly increase over the next decades, from 40 million tons in 2017 to almost 70 million tons in 2030. As the grain sector in Ukraine is one of the most promising growth sectors for the next decades, SE SC Olvia needs to position itself to take advantage of future growth opportunities.