Doing business in ports of Latvia: Foreign investor’s perspective

1. 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

2. 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

3. 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

4. Case study: Tugboats in FreeportofRiga • 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

5. PKL Flote vs. Riga Port Authority Legal Proceedings: Latvian Competition Council • Competition Council Decision - March 2009 Abuse of dominant position by Riga Free Port to the detriment of private service provider and all port clients FINE 45 000 LVL - Court upholds • Competition Council Decision - April 2010 Same facts of the case – repeated abuse of dominant position FINE 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

6. PKL Flote vs. Riga Port Authority 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 Flotehas 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 Authoritymust 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

7. 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 • 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

8. 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

9. 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 nondiscriminatory access to everyone • Provide in websites information about free territories for business

10. How to Improve Safety of Investments 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 making

11. For further information, please do not hesitate to contact me at: Artūrs Spīgulis, Attorney at Law Spīgulis & Kukainis Law Firm Email: arturs@sk-legal.com Mob: +371 2613 8791 www.sk-legal.com