DOING BUSINESS IN PORTS OF LATVIA: FOREIGN INVESTOR’S PERSPECTIVE

Latvian Ports – the Golden Egg of the Economy ?

Artūrs Spīgulis, LL.M, Attorney at Law

22 November 2011

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HOW TO START A BUSINESS IN PORTS

• Requirement to conclude an agreement with Port Authority: serves as a license- Many investors quit at this stage

• Three types of agreements on commercial activities

• Private law vs. Public law

• Criteria to conclude an agreement-Good reputation, financial well being and experience (subjective requirement)-Territory in port-Business and investment plan (subjective requirement)

• Term of agreement: one year, five years, ? years

• Limits of business – within particular port territory only

• Tax discounts: mission impossible? - Riga port: only 17 port companies out of 85 have rights to apply tax discounts

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ESTABLISHING A BUSINESS IN THE PORTMOST COMMONLY ENCOUNTERED PROBLEMS

• Access to infrastructure: inside and outside the Port territory - Road, rail, electricity- Discriminatory pricing

• Terms and prices of lease agreements

• Duty to concert with Port Authority, no transparency of its expected decisions

• Prolongation of commercial agreements

• Lack of effective procedure to appeal Port Authority decisions

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CASE STUDY: TUGBOATS IN FREEPORT OF RIGA • Private tugboat company PKL Flote – Doing business in Freeport of Riga since 1997 (Estonian and Dutch

investors), working also in Ventspils port

• In 2008 – Port Authority enters tugboat business: closes market, does not let new operators in, squeezes out existing providers

• Port Authority increases tug’s power requirements – private company invests EUR 10 mil to meet new standards

• Attempt to modify law – competition laws should not apply to Riga Port Authority

• Since 2011 Riga Port Authority works alone, bans private company PKL - Numerous ships stuck in ice during March and April 2011

• July 2011 – court orders Freeport of Riga to reinstate PKL Flote in provision of tugboat services

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Tugboat Providers in Freeport of Riga 2008

PKL Flote Port Authority

Experience - years 11 0

Number of Tugs 8 2

Pricing Discount to 40% Full Price

Tax Regime All Taxes Apply No Income Tax

Market Share 25 % 75%

PKL FLOTE VS. RIGA PORT AUTHORITY

LEGAL PROCEEDINGS: LATVIAN COMPETITION COUNCIL

•Competition Council Decision - March 2009Abuse of dominant position by Riga Free Port to the detriment of private service provider and all port clientsFINE 45 000 LVL - Court upholds

•Competition Council Decision - April 2010 Same facts of the case – repeated abuse of dominant positionFINE 10 000 LVL - Court upholds

•Competition Council Decision - April 2011 Same facts of the case – repeated abuse of dominant position FINE 105 000 LVL – Appeal pending

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LEGAL PROCEEDINGS: LATVIAN ADMINISTRATIVE COURTS

•Administrative Court Ruling 2010 Riga Port Authority unlawfully : -imposed a duty on PKL Flote to release its discounts online-Dishonestly divided income to Port Authority’s benefit -Modified prices of tugboat services without acquiring operator’s opinion

•Supreme Court Ruling May 2011 - Riga Port Authority can not arbitrary decide who works in port – anyone who meets the

criteria set in law, must be allowed to provide services - PKL Flote has access to administrative court to review Port Authority decisions - Freeport of Riga has misinterpreted the law in previous years by preventing access to courts

for private companies, wrongly stating its decisions are subject to private and not public law

•Administrative Court Rulings in June and July 2011 - Two tugboat companies unlawfully, without justification, were barred from providing tugboat services in Freeport of Riga, Port Authority must conclude agreements with these companies on provision of commercial activities

• Administrative Court Ruling in November 2011 - Port Authority has failed to duly fulfill court ruling of June, has sent a discriminatory agreement

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PKL FLOTE VS. RIGA PORT AUTHORITY

CASE STUDY: JSC VENTSPILS GRAIN TERMINAL

• September 2005 Ventspils Port Authority does not allow ships to unload at VGT

• May 2006 Port Authority increases land lease amount 50 times

• June 2011 Port Authority refuses to prolong railroad lease agreement

• September 2011 Port Authority bans development of pasta factory at VGT, loss of $ 40 mil investments

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• Opened in 2005

• USD 20 mil investment

• Lease of land, berth and road: 20 years, but railroad 5 years

• 100% owned by Kazakhstan investor, which is one of the World’s leading grain trading and producing company

• Max annual turnover 1.5 mil tons of grain

STATE CONTROL REPORT ON VENTSPILS FREE PORT

PROBLEMS DISCOVERED: • Discriminatory approach regarding sub-lease,

lease terms and payment amounts

• Failure to inform about available land plots

• Incorrect supervision of Port Authority by Government

• Failure to comply with its investment program, commencement of unplanned projects

• Non transparent decision making and price

policy

COMPARISON OF VENTSPILS PORT WITH COMPETING PORTS

• Port income per 1 lat paid in salaries • Ventspils LVL 6.51• Klaipeda LVL 10.76• Tallinn LVL 11.10

• Profit from 1 t cargo (2010)• Ventspils LVL 0.28• Klaipeda LVL 0.37• Tallinn LVL 0.93

• Ventspils cargo turnover per 1 ha of port territory

• 33% of Klaipeda turnover • 41% of Tallinn turnover

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HOW TO IMPROVE SAFETY OF INVESTMENTS

PRACTICAL STEPS

•Invest all port income in infrastructure, to ensure fully functional terminals

•Avoid squeezing out private companies – loss of reputation and competition

•Transform into a purely landlord port

•Take control of transport infrastructure, provide non discriminatory access to everyone

•Provide in websites information about free territories for business

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LEGAL STEPS

•Modernize Law on Ports and related legislation

•Change obsolete management structure

•Subject all decisions to effective appeal or tribunal: expedited proceedings at Administrative courts

•Liberalize services and prices

•Ease criteria and bureaucracy to start up business

•Provide transparency and involve stakeholders in decision making10

HOW TO IMPROVE SAFETY OF INVESTMENTS

FOR FURTHER INFORMATION, PLEASE DO NOT HESITATE TO CONTACT ME AT:

Artūrs Spīgulis, Attorney at LawSpīgulis & Kukainis Law Firm

Email: arturs@sk-legal.comMob: +371 2613 8791 www.sk-legal.com

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