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  • 2016 August 25

    Antitrust watchdog's initiative triggers worries, questions among stevedores, experts

    A proposal of the Federal Antimonopoly Service of Russia (FAS) to return to a policy of regulation of tariffs / in RUB for stevedoring services in ports has disturbed the market participants. Terminal operators and the sector's experts, believe such a decision would slow down the development of the country's port infrastructure and that foreign companies and those shippers that did not invest in the development of port facilities would be the only winners.

    The winner takes it all
    The Russian port industry is one of the most successful in the structure of the country's economy. This is evident from an upward trend in freight volumes at sea ports seen in recent years, despite all the economic crises. Thanks to injections both from public and primarily private funds into port infrastructure development, Russia has managed to significantly reduce its dependence on foreign ports in neighboring countries, which is especially important in the recent geopolitical tensions.

    The experts have no doubt that such gains were cased, inter alia, with the abolition of the price regulation of activities of stevedoring services providers.
    Remarkably, the fact has been acknowledged by the same antitrust watchdog. Speaking at the FAS Methodological Council meeting held August 12, a FAS deputy chief Anatoly Golomolzin highlighted that the decision on deregulation of tariffs, which had been adopted earlier, has helped preserve the favorable economic results.

    However, deregulation does not mean, Golomolzin said, that the market situation will be uncontrollable. The norms of antimonopoly legislation are still effective and it can be enforced against offending parties.

    There must be non-discriminatory, competitive rules that would guarantee access to limited port infrastructure. The FAS official believes that state policy in this area must be stable and consistent.

    Another deputy chief of the service Andrei Tsarikovsky has said that the FAS is considering the abolition of price deregulation as the rates for steveodring services had soared exponentially. Earlier the FAS stated that their ultimate goal is to reduce the margin of ports to a level "comparable with other participants in the transport chain, especially Russian Railways".

    The contradictory stance of the antimonopoly authority on the issue has caused confusion among the participants of stevedoring market, the Ministry of Transport and experts.

    The Russian Transport Deputy Minister, the head of Rosmorrechflot Viktor Olersky has told the media that the rates for stevedoring services in ports are determined by the market forces, supply and demand. "If they can not afford, they don't pay. And we see that the rate is not constant, it is changing. And as I always say, there is a recipe to cut it: to offer better number of other stevedoring services," Victor Olersky was quoted as saying.

    The Association of Commercial Sea Ports (ASOP) has slammed the FAS regulatory initiatives. According to ASOP's estimates, as a result of foreign exchange losses and delays in indexing port charges the industry has lost only in port dues about RUB 8-9 billion that actually went to foreign shipowners. A return to price regulation of stevedoring companies' rates will lead to the same result, as well as adversely affect the development of ports, reduction of investments in the development of the industry of strategic importance for the country.

    The voice of Institute of Natural Monopolies (IPEM) was added to the chorus of critics of FAS initiative. IPEM says the reincarnation of tariffs regulation policy by regulatory authority will bring benefits only to foreign companies. The institute experts believe that the decrease of rates and profits of stevedoring companies if the government decides to return to price regulation of rates for their services means lower costs and an increase of profits of shippers. In this case the tax on income derived from handling of imports and transits, will be lost completely to the federal budget and foreign companies may turn out to be the only winning party who would benefit from the THC cuts. IPEM also noted that the return of regulation will decrease tax revenues in the budgets of the regions where the terminals are based. On the other hand, the regions where the taxpayers (shippers) are registered will be able to get more taxes as their costs will be reduced.

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    Thou shalt not covet...
    Growing rates was named by FAS as one of the main reasons to roll back to state regulation of tariffs. However, opponents of regulation argue that rates were rising in rubles, but not in foreign currency (converted to rubles the rates even dropped in some ports). On the contrary shippers, exporters receive revenue in USD, EUR, etc.

    For their part, shippers who did not invest in their own port facilities, are inclined to support the FAS proposal. A representative of RUSAL, said at the panel discussion of this issue held at Analytical Center of the Russian Governmentthat although the company's revenues are earned in foreign currency, however, due to lower prices in global markets, this revenue has decreased. Not so with the port and terminal charges.

    It is clear that there are some ports in Russia which are not competitive (those are mainly remote arctic harbors). However, in the largest, key port hubs, providing the lion's share of throughput and with competitive environment. And it would be unreleasable to have one approach to all ports.

    In addition, the FAS, proposing to slash the profitability of stevedore operations and nominate their tariffs in rubles, in our view, ignores the realities of the national economy reality. First, it does not take into account the cost of borrowed funds (which is extremely high in Russia and with low profitability the businesses will not be able to service the loans), as well as the lack of "long-term loans". According to market participants, 70% of the tariff account for loan servicing. And if prime cost of handling dry bulk cargo in Russian ports is an average of $ 2.0-$3.0 per tonne, than to ensure repayment of a "short-term loan" at 15% per annum is possible only by keeping the rate not below $ 10.0 per tonne. If Russian banks would grant loans on western banks conditions, ie. for 30 years /3% p.a., that's something entirely different.

    Secondly, the agency does not consider a high dependence on foreign equipment, which, of course, also is procured for foreign currency. Thirdly, if we make stevedores reduce profitability, then we should build at public expenses all the core infrastructure. However, the state is trying whenever possible to pass along the costs to businesses. Therefore, the FAS proposal, in our opinion, contradicts to state policy to slash budget expenditures and stimulate development through private initiatives.

    As to the interests of shippers, who do not have their own port facilities, it is possible to note the following. Of course, regulators should ensure for producers non-discriminatory access to the ports but it can be done in certain places and the total regulation of the industry is not necessary. On the other hand it is not very clear why the taxpayers, as well as enterprises, who had built and developed their own terminals, must at their own expense to fund those companies that have not invested in the development of port infrastructure and do not bear the related costs and risks?

    Eventually, only the development of port infrastructure capable of creating a competitive environment and thus cutting tariffs thanks to market forces. But this requires investments that will inevitably shink if the regulator succeeds in imposing tariffs regulation.

    Vitaly Chernov