20 years of successful cooperation

Twenty years have passed since the German logistics group HHLA (present turnover is more than 1.25 billion euros) took container terminal of Odessa seaport under the wing. Today, its Ukrainian subsidiary Container Terminal Odessa (until 2017 known as SC HPC Ukraina), which operates a container terminal at the Quarantine mole, is the all-time leader of container handling in Ukraine and one of the headline players in the Black Sea region container market.

Cooperation between HHLA CTO and the Odessa port may serve as an example of public and private partnership, which once let Odessa port take a leading position in the industry and move further to the reforms. To date, the total volume of German investments in the container facilities development in the port of Odessa has exceeded 170 million euros. Anastas Kokkin, General Director of HHLA CTO, told Ports of Ukraine about the long way come, the company's achievements, new projects, European service and Ukrainian realities.

„We and our German shareholders believe in successful development of the Ukrainian economy.“

Klaus Schmoecker, at that time president of SC HPC Ukraina, in July 2016 introduced Anastas Kokkin as a new general director.

20 years of work in Odessa Port have passed. How was this way, what did you manage to implement over these years?

Many things have already been said and written about how the company began its way in the Ukrainian market. I would like to tell you about what has been done in the last five years of our work. I personally also have a small anniversary this year. Five years ago, in July 2016, at the celebration of the 15th company anniversary, Mr. Klaus Schmoecker, who at that time was the president of the then-HPC Ukraina and one of the founders of the company, introduced me to the labor collective as the new general manager. In fact, he was the mastermind and the "locomotive" of the Company development. Kind parting words were said then by the honored coryphaeus of the port industry, Nikolay Pavlyuk, who did a lot to attract large foreign investors to Odessa port, including the German company HHLA AG. It was a great honor and responsibility for me to pick up the torch in managing this company, further strengthening and developing the business. I am very grateful to Klaus Schmoecker, who brought me to the company, and who, to our greatest regret, passed away due to a serious disease. We all pay tribute to his memory!

All these past five years I have been making every effort to further successfully develop the joint project with the port, the project of the largest German investments in the maritime industry of the Ukraine. I try to develop, learn and, as a manager, keep the high management standards of the large international and European business.

What was the most difficult thing for you?

I’ll be frank with you, due to a number of objective factors and new challenges related to the situation in the port sector my start in the company, to say the very least, was rather stressful. The example is that a little more than a week after I took over as General Director, a rouge storm abnormal for this region hit Odessa with powerful waves of more than 4 m high.

The terminal was heavily flooded and a part of the Southern embankment of the Quarantine mole was destroyed. We managed to quickly eliminate the consequences and continue the smooth terminal service. Recovery operations were carried out under the control of the international insurance club, where the terminal is insured. Along with that, a new project was developed for stabilization of the Southern embankment structure in access of regular local safety norms, after several years of observations, surveys and calculations performed by both Ukrainian and German experts. The project was approved by all authorities and now we have started implementing it at the company’s expense.

Moreover , at that time, a serious tightening competition among container terminals began within the Ukraine. This happened not only against the background of overcapacity of the container handling facilities and the aggressive policy of some competing terminals, which, by all means, had to get customers and cargo flows, but also in the environment where the state let the tariffs for port services float freely.

We faced with a complicated strategic task to hold our ground as a leader of the Ukrainian container market and over the longer term to attain terminal cargo base growth. This required modernization of terminal facilities and a number of internal reforms that were to optimize processes, to ensure the rotation and strengthening of the management team, to quickly master new technologies and work forms. Judging by the results, today we can confidently say that our management team and all employees have successfully coped with this, which I consider a great victory for us all and the most important stage in the company development.

What is the difference between your terminal and other Ukrainian container terminals?

Together with the high level of service, I would single out two key benefits.

Generally, there is no queue of container vessels in the harbor roads and, as a rule, for berthing and handling of the international container lines’ vessels straight uponthey approach the port. Among other things this was achieved by means of simultaneous simultaneous handling handling of two and sometimes even three container vessels with high productivity level. In 2016-18, we organized our Dockers’ work in such a way that the simultaneous handling of two or more vessels became a common practice for our terminal. We managed to increase productivity levels also by using most modern handling equipment, in particular, container cranes at the Quarantine mole berths by performing the so-called twin-lift operations, thanks to which we simultaneously handle 2 laden 20’’ containers. As a result, we have the largest number of clients whose time we value aslong downtime of liner container vessels costs too much.

Working on improving the service for our clients, HHLA CTO constantly and heavily invests in new technologies. Among the modern IT solutions of recent years I would like to single out the project of implementing a free of charge high-tech web-portal for our clients. This web service enabled gradual switch over to electronic documentary flows when documenting and handling containers at our terminal, which brought a lot of essential comfort and benefits for all clients of HHLA CTO. In synergy with Odessa port, this allowed to significantly increase the

speed of registration formalities required for the arrival of container trucks at the port. As a result, for the first time in Ukraine, all forwarders have concluded contracts with the port terminal through our web portal in electronic form and work using electronic digital signatures. I would like to emphasize that HHLA CTO web-portal is based on the latest European technologies and is a reliable tool for organizing effective process within the framework of interaction between the Odessa port, HHLA CTO and the terminal's clients. It is duly certified by the State Service for Special Communications and Information Protection.

Given the Ukrainian realities, did you manage to fully implement European standards and German quality at the terminal in Odessa port?

It is an interesting question. I would like to note that any standards are dynamic, and they gradually become stricter along with the market development. Nevertheless, I can surely say that the basic principles of European quality standards have been implemented at CTO in all key areas of our activity, and the implementation continues. It is a long way which we are successfully moving on. In 2017-18, the company was completely rebranded. It was not just a change of the logo and name from HPC Ukraina to HHLA Container Terminal Odessa. Upon decision of our German shareholders, based on the concluded foreign economic agreement, the terminal officially gained the right to use the registered trademark of HHLA, which is widely known all over the world as a trademark of the leading in Europe German logistics holding HHLA AG (port of Hamburg). This, of course, carries serious responsibilities, but at the same time it is an honour for the terminal and all the personnel. Since then, our German shareholders actually advanced the requirements for achieving and monitoring compliance of HHLA CTO with the European standards as high as for the leading German container terminals in the port of Hamburg.

Does this affect the environment too?

Undoubtedly. The key to success and sustainable development of any business, including large public port terminals, is the focus on maximum environmental friendliness of operation and adherence to the concept of sustainable development. HHLA CTO has successfully completed the public procedure on assessment of the environmental impact of the company operations and in 2019 received a positive conclusion from the relevant authorized state body. I would like to emphasize that the company has implemented and is successfully operating environmental and social management system to comply with the international standards and best practices with respect to the protection of the surrounding natural and social environment . In 2020, HHLA CTO received certificates of compliance with international standards ISO 45001: 2018 "Occupational health and safety systems" and ISO 14001: 2015 "Environmental management system". HHLA

CTO strictly adheres to the international principles of compliance. The company has implemented the compliance management system; there is a valid Code of Conduct mandatory for fulfillment by the company employees , a number of activities are carried out on a regular basis, including detailed communications with the team and training of employees. In 2021 SC CTO has successfully passed a detailed compliance audit performed by a team of international experts and auditors. Compliance is an important part of the business culture both of CTO and the entire HHLA group of companies.

What are the company approaches in terms of social standards?

The level of social standards and respective packages for employees is one of the highest in Ukrainian port sector. After all, we focus not only on the requirements of Ukrainian legislation, but also on the high social standards of the parent holding. Nevertheless, the company administration held long and difficult negotiations with the trade union and the labor collective, but as a result we were able to achieve a balance of interests when entering into a new collective agreement, which was officially recognized as one of the best in the industry. HHLA CTO is the winner in the nomination "For the highest achievements in occupational health and safety ."

I would like to note that a fair employee compensation plan and a generally high level of social standards over many years gives us a possibility to keep the core team, consisting of highly professional and experienced workers.

Let’s come back to your main investments. The container terminal extension at Quarantine mole is the largest long term project. Where is the construction now?

Yes, indeed, the long-term investment project of container terminal extension at the Quarantine mole, which has been jointly implemented with the port of Odessa since 2009, is the flagship of Ukrainian container market. On the part of SC CTO, the project is being implemented ahead of schedule. Over the last three years, the 4th launch complex was fully built and a modern yard for container cargo storage and handling was arranged there in the rear of the new berth #2K. RTG cranes and other handling equipment have been purchased and erected. All the necessary utilities and lighting have been installed. Thanks to the German parent company, more than 120 million euros have already been invested in this project, including the reclamation of the new territory of 19.3 hectares, the purchase and installation of modern container handling equipment from the leading global manufacturers, etc. As of today, overall more than 170 million euros have been invested in the terminal.

Unfortunately, for the time being the Administration of the seaports of Ukraine has yet fulfilled not all their investment obligations. Since 2014, when a part of the protective breakwater collapsed, much has been said and written about this, there were constant investigations, criminal and court cases including those at the state level, to find out actual reasoning behind this . As a result, the port has not yet built the breakwater, that is, the 3rd launch complex. This situation is probably the most unpleasant for us in the context of the implementation of a public and private partnership project in the maritime sector as here we are talking about ensuring maritime safety, safety of operations and assets, including state berths 1K and 2K.

Thanks to the strong support of our shareholders, the German Government and with the direct involvement of the president of the company, Mr. Philip Sweens, we managed to get the ball rolling. This year, the USPA allocated the necessary funds for continuation of breakwater construction. The revised design documentation has already successfully passed the state expertize. At the moment the project is pending approval from the Ministry of Infrastructure.

After an open tender for the selection of a contractor, USPA plans to start the works immediately.

In this context how do you generally assess the state support of investment projects in the Ukrainian port industry?

We see significant progress and are grateful to the Ukrainian government for measures to improve the investment climate for foreign investors and this includes not only the recent progress on the breakwater. As we know, Ukravtodor has already begun construction of a new public road for an alternative and free entrance to the Odessa port, which is extremely important for the ecology of the city, business society, and in general for the development of the port.

Of course, this is just the beginning. It is now important to ensure that these projects are fulfilled. We expect that nothing will stand in the way taken by the government for the development of transport infrastructure, which will make preconditions for further development of the country's foreign trade potential.

When, according to our estimations, the Quarantine mole terminal can reach its design capacity, taking into account weak containerization of cargo in Ukraine and the excess of container capacity? What are the prospects for the development of the Ukrainian container market in general?

This is a very complicated question, many factors influence the situation and in fact there is little chance to give a more or less accurate forecast. According to the general forecasts of many experts, container volumes in Ukraine could potentially double in the next ten years while already today the existing port capacities for handling container cargo is least 2.5 times over present actual volumes. Of course, given a very favorable development of the economic situation and if there will be no significant negative impact of external factors, there is a chance of faster growth in container volumes, given the extremely low overall level of containerization of cargo flows at the Ukrainian market. However, as I said, the project to extend the Quarantine mole container terminal is a long-term project, and therefore it is always good to have certain capacity reserve. This provides great opportunities for the clients of HHLA CTO to quickly develop their business on demand and have flexibility in the tough competitive environment. The terminal in its turn is therefore able to avoid congestion and various difficulties related in case of peak loads arising from time to time at the market.

With regard to transit, of course, there is a potential for return and an increase in the transit container volumes for Ukraine that may positively affect the growth of container traffic overall. However, this will depend on the influence of various geopolitical and other factors impact.

In addition to containers, your company started handling grain and other cargo. What is the share of the new cargo traffic today in the total handling volume?

If we talk about the diversification of our business, it should be noted that it is procured exactly due to a certain spare of the terminal's capacity and therefore intention to increase the current level of efficient utilization of existing assets. We are handling various project cargoes including OOG cargo. We also provide large grain vessels top off for our neighboring terminals in  

Odessa port, taking advantage of the depths at our Quarantine mole berths, the largest in Odessa port. At the same time, I would like to note that HHLA CTO is not a grain terminal, as it does not have capacities for storing grain cargoes. Nevertheless, the said top off operations are performed in a high-tech and environmentally friendly way by using special-purpose containers with an automatically opening bottom, grain is transported from other terminals in the port directly to the berth during vessel loading.

I would like to note that the share of such cargo is not so significant yet. It depends on market conditions, seasonality and other factors. Therefore, for the terminal, so far it is, so to say, a "permanent supplementary option" to the main container business, although we are working on development of this business.

How has the coronavirus pandemic affected your operation performance?

Unfortunately, the coronavirus pandemic negatively impacted overall container volumes at Ukrainian market and of course our terminal, in particular. Especially in 2020. In the second half of the year, the annual volume at the terminal decreased by 5% compared to 2019. The negative trend continued in the first half of 2021 although now we note a visible trend for recovery. We ended the first half of 2021 with an increase of 2.5% as compared to the first half of 2020, if counted in TEU. We expect better results from the second half of the year.

Last year HHLA announced creation of Ukrainian Intermodal Company for development of container railroad transportation and participation of SC CTO in this project. Would you tell more details, please?

This is a big subject for another discussion. In a few words, I can say that rail transportation, both in the eyes of most experts and keeping in mind European and world experience, is the future of the land logistics. As you know, one of the key companies of our parent holding, Metrans is one of the three largest and leading intermodal operators in Europe and is a high-tech logistics network of the intermodal terminals in European countries. It owns a fleet of thousands of railway cars and platforms and a significant fleet of locomotives. This gives the company a possibility to operate more than 500 regular container trains per week all over Europe.

The business idea of ​​creating a new company in Ukraine lies in using an extremely successful experience and know-how to consistently build a similar business in our country. However to put it bluntly, due to a number of objective and subjective reasons, normal conditions have not yet been created in this segment in Ukraine for doing and developing business on the basis of equal opportunities and fair competition, due to legislative and other deficiencies. Although the potential for development is enormous. For these reasons, the development of the Ukrainian Intermodal Company which was founded by our group in Ukraine, and where HHLA CTO has major share, is still going rather slowly, taking into account the conservative principle "caution is the parent of safety". At the same time, I must say, without disclosing details, that the capabilities of our group, its plans and prospects for investing in this segment of the Ukrainian economy are very significant.

What does a quality intermodal service mean according to the European standard and how far is it possible in Ukraine?

At this stage, we are gradually building a balanced approach to provide high-quality and reliable European intermodal service for customers in the Ukrainian market, and plan to expand cooperation in this area with the state represented by Ukrzaliznytsia and the Ministry of Infrastructure.

In recent years, HHLA CTO has significantly improved the performance of handling railway cargo in containers. Since 2018, in cooperation with UZ, we have ensured handling of the first regular container trains at Odessa port. This year we have successfully completed the long-expected and higly market demanded investment project on reconstruction of the terminal railway tracks, which made it possible to double capacity for handling railway cargo in containers. Now the total length of tracks at the terminal is 1,800 meters, which dramatically expands our capacity in handling regular container trains. Both the Ukrainian Intermodal Company and other market players can use this terminal advantage.

How do you assess the recent concession law?

The law is definitely a big step forward. However, it is a little bit rough around the edges and does not yet take into account all aspects of legal and economic relations, the regulation of which are necessary for its proper functioning.

Now, as far as we know, preparatory work is ongoing to introduce amendments and additions to this law, which can really activate this investment instrument, which is widely and successfully used all over the world and, in particular, in Europe.

Truth be told, even a revised concession law seems to be not enough for a successful concession launch. In addition to constant high-quality and transparent regulation of management processes, the state needs to develop a concept and strategy for the use of a concession, so that any concession project is measured and works for the benefit not only of a specific business, but also of the Ukrainian economy. I will give a small example regarding our port container industry.

As I have already noted, now (and in prospect of more than seven years) the existing throughput capacity of container facilities in Ukrainian ports will significantly exceed the actual container volumes. At the same time, all world's leading container carriers that bring import, export and transit cargo to the country have been for a long time and efficiently working at the Ukrainian market cooperating with the existing terminals. Therefore, at this stage concession of additional container port facilities obviously cannot bring any new clients or any new cargo flows to the state. In this case, it turns out that a potential new concessionaire who will invest in the container terminal has only one opportunity, that is to gain existing customers and cargo flows from other operating terminals, for instance, by initial dumping pricing. All this will result in deterioration in the financial health of the majority of market participants and, ultimately, to a general decrease in revenues to the state budget of Ukraine. Therefore, a well-prepared state strategy should in advance give answers to raised by the business . It might be necessary to provide criteria for feasibility of the port facilities concession of the in specific economy sectors and also the possibility of re-orientation of the assets transferred to concession for a new

purpose use into those economy sectors where they are objectively necessary and justified by the market demand .

If we ignore the disadvantages of the law, is your company basically interested in the container capacity concession? Do you consider the possibility of transition to a concessionary relationship in Odessa port?

Sure. In this regard, our lawyers and economists are engaged in preparatory analytical work and are considering possible options for HHLA CTO. In case internal analysis will lead to positive results , as well as making amendments to the concession law that are necessary for the state and the market, we will be ready to consider the appropriate options together with the USPA and the Ukrainian government .

In conclusion, I would like to draw your attention to the fact that in 20 years of successful work at the Ukrainian market, we, as a large foreign investor, have proved our reliability as a partner to the state. We and our German shareholders believe in the successful development of the Ukrainian economy and are working hard to achieve progress in our business projects. We are ready and want to continue investing in industry-specific transport projects and the development of container and railway infrastructure in Ukraine.

„It is important for the investors to have their investments protected.“

President of CTO Philip Sweens about Ukrainian market and prospects of its development.

Despite the high risks: political instability, imperfect legislation, constantly changing rules of the game, military operations in the East of the country and the current coronavirus pandemic, HHLA never stopped investing in the development of container capacities of Odessa port and other projects. What is the interest of the German business of the Ukrainian market?

Ukrainian market is not an easy market but at the same time it has and continues to offer a lot of further development potential. We have been present in the Ukraine for the past 20 years and thus seen the up’s and down’s that the country experienced but as a company we have managed to rebound and further develop the business. Our PPP set up is lasting until 2044 and we look forward to continue being an active participant in the development of the Ukrainian market.

What do you see the role of Ukraine as a transit country and the place of the Port of Odessa in the international logistics chain in this process? What are the prospects here?

The Ukraine and in particular the port of Odessa have traditionally been a transport hub linking the Black Sea to the Hinterland in the Ukraine and abroad. Recently, the amount of transit cargo via the Ukraine has diminished mostly due to political tension. We are still confident that Odessa can reclaim this role in the future but this will require also ensuring an efficient movement of goods within the Ukraine and at the borders to neighboring countries. 

There are still quite some efforts required to improve the administrative barriers. We see the need to improve the efficiency of hinterland transport and for this have created a new intermodal company Ukrainian Intermodal Company (UIC) at this stage aiming at developing efficient links between the Ukrainian ports and the hinterland.

Are foreign investors still very feared of doing business in Ukrainian ports? From your point of view, what should be done first of all to change the attitude of business to Ukraine?

Foreign investors, in particular those who have no previous experience doing business in the Ukraine, do have some apprehension regarding an involvement in the country. This is particularly true for port investments which cannot be moved from one country to the other in case of crisis.  It is important for the investors, is to have security concerning their investment. For this several instruments will increase the confidence of investors, including investment guarantees, a transparent legal agreement (concession or similar mechanisms) and the objective enforceability in court in case of litigation. The Ukrainian government has been actively addressing these different issues, but there are still further improvements required to increase the confidence of future investors.

„There were never any further questions when help and support were at stake.“

Svetlana Yarovaya, Vice President for Public Relations, SC CTO, Hamburg Ambassador, about social responsibility of the business

From the first days of our company in theUkraine, the matter of social responsibility of our business was one of the very important. After all, the company's management has staked on the past, present and our future. Therefore, no further questions ever arose when it came to helping veterans, children, artists, musicians, or in general about supporting cultural and social projects, or assistance in emergencies, as in the case of the coronavirus.

I can say that in the first months of the pandemic, our company, together with the Odessa Port Stevedores Association, immediately responded to the call for business to help the city's medical institutions and elderly people.

If we generally talk about the job we did, then I can proudly note that for many years our company has been closely cooperating with the Association of Odessa Port Veterans, helping those who have put their efforts into the development of the port, including the veterans of our company.

Many years our company has been supporting the Living Hope Charitable Foundation. We inherited the Foundation, if I may say so, from the wife of the German Ambassador Hans-Jürgen Heimsoeth. Founded in 1999 by a German-Ukrainian couple, Vyacheslav and Nicole Borisyuk, the foundation takes care of the street children and teenagers from single-parent and troubled families. We are especially happy for those children who, thanks to the help of this organization, were able to change their lives, become social care teachers and tutors. After entering

universities and getting education, they return to the foundation to help others.

Beyond that our company supports cultural initiatives. I am especially inspired by the projects that bring beauty and joy and, of course, those related to the sea and the port. In this case, I mean the plein air projects of the Odessa port Marine Gallery in the ports of Hamburg and Odessa. Ukrainian painters drew views of the night port in Germany and Ukraine, conveying their emotions on canvas.

I would like to particularly note the international Odessa Classics festival under the leadership of its founder, Honoured Artist of Ukraine, Chevalier of the Ordine della Stella d'Italia, piano player Alexei Botvinov. The festival, which has already become an annual one, can be called the pearl of the cultural life of our city. Even despite the pandemic and related restrictions, the festival took place both last and this year. It was a great pleasure for our company to support the participation of the most famous German musicians. By the way, the most known pianist in Germany, Sebastian Knauer, who was a guest of the festival, was born and lives in Hamburg. With our support, Odessa Classics was also presented in his hometown and in Berlin. In Odessa, the festival is organized with the joint support of our company and the Odessa Port Stevedores Association.

To sum up, I want to emphasize that social and cultural projects being excellent incentive for our company, striving to move forward, to new success and achievements.