Report on the Free Port of Riga

Office of the Coordinator for
Assistance to Europe and Eurasia

Washington, DC
May 2006

Free Port of Riga in Latvia

Executive Summary

A State Department-led team of experts visited Riga, Latvia, during the week of March 13, 2006, to conduct a review of the Free Port of Riga’s security and counter-corruption needs, as well as to explore bilateral best practices and look into the potential for mutually beneficial economic development of the Port and its facilities. The team had broad access to and cooperation from Latvian officials, both in the Government and the Port.

The Port is large, growing, and an important economic asset for Latvia. Most of the needed legislation and international agreement commitments are in place, as is much of the infrastructure required for the Port to meet minimal security standards. The team noted that the Riga Free Port organizational and management structure is unique, and believes that improvements in the overall management structure for the Port and in various procedures would increase efficiency and security, as well as help port authorities and Latvian government offices better position themselves to address transparency concerns in the Port. The team’s specific observations and suggestions appear at the end of this report.

Many of the most important decisions confronting the Port are political ones. The Port Authority has ambitious plans to move the Port’s center of gravity downstream from Riga toward the Baltic Sea. The sprawling area currently included within the Free Port would be consolidated in the process and certain key facilities relocated, modernized, and/or expanded. This relocation plan depends upon sufficient economic resources to effect the move, in addition to clarifying political and legal issues that may arise in connection with the sale of properties currently occupied by Port authorities and tenants. The team agreed with the logic of the proposed approach, while noting that the Port will need an increased revenue stream (as well as funding from other sources such as the European Union, the national government, and private lenders) to pay for the move.

Description of the Task

In response to language in Report 109-96 by the Senate Committee on Appropriations and in Report 109-265 by the Committee of Conference, relating to the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2006 (P.L. 109-102), the Department of State sent a six-person team of experts to Riga, Latvia, during the week of March 13, 2006. The team members represented broad experience in customs operations, Coast Guard activities, port security, the economic development of ports, and regional expertise. The purpose of the visit was to assess the security and counter-corruption needs in the Free Port of Riga, as well as to look into possibilities for the mutually beneficial economic development of the Port. The Government of Latvia and the Riga Municipal Government both place high priority on enhancing the efficiency, security, and economic viability of the Port, which they rightly consider to be a valuable national asset. As Latvia is now a member of the European Union (EU) and is subject to EU standards and regulations, any outside funding necessary for developing and upgrading the Port will need to come from EU sources. Further initiatives that specifically address operational changes in port security and operations will necessarily take place under the broader operational and policy umbrella of overarching U.S.-EU agreements such as those that govern compliance with port security issues, like the International Ship and Port facility Code (ISPS).

The team met with Prime Minister Aigars Kalvitis, Riga Mayor Aivars Aksenoks (twice), Chief Executive Officer Leonids Loginovs and other members of the Free Port of Riga Authority, members of the Board of the Free Port, the Harbor Master, and representatives of the Latvian Customs Service, Border Police, Coast Guard, and others involved in the Port’s operations. In addition to these meetings, the team visited and/or observed a wide range of facilities and activities in or relating to the Port. The cooperation and access provided by the Port Authority and other Latvian entities were outstanding, as was the invaluable logistical support extended by the U.S. Embassy in Riga. Although the team had neither the time nor the resources to conduct an in-depth examination of the Port, it observed enough and received sufficient information to enable it to reach the conclusions appearing at the end of this report.

Free Port of Riga – Background and Port Characteristics

The Free Port of Riga is a rapidly growing port located on the banks of the Daugava River in the Gulf of Riga, an arm of the Baltic Sea. The “Free Port” designation under Latvian law provides additional incentives for businesses to use the port and included reduced, value added and excise taxes, in addition to lower customs duties. It has the characteristics of a modernizing port that recognizes its obligations in the post-9/11 environment to conduct operations with increased levels of seaport security.

Situated on an ancient trade route between Russia and Europe, the city of Riga has been an important trading and shipping center for over 800 years. With Latvia’s return to independence in 1991, and its recent admission into the EU and NATO, the Port of Riga is in a unique position to continue and expand its role as a significant transportation hub. There is tremendous growth potential for the region, Riga, and the Port, with transport connections to the Trans-Siberian rail route and direct links with Russia and other countries of the former Soviet Union, as well as the rapidly growing Baltic countries and even East Asia, including China. The Free Port already has important transportation capabilities, including maritime shipping, rail lines, and road freight. In addition, Riga is the main all-weather port in the Baltic. The Port has a substantial advantage in that it has unused capacity and can nearly double the present cargo throughput with existing facilities. The Port anticipates expanded trade with China and additional cargo transit to and from Russia and other former Soviet states over the next few years.

The Free Port of Riga was established as an entity in 1994 by the Latvian Law on Ports and was granted Free Trade Zone status in 2002. Overseen by an eight-person Board consisting of four members from the City of Riga and four from the ministries of the national government, the Riga Free Port Authority administers land and provides port-related services at numerous facilities along both sides of a 15-mile (25 km) section of the river. The Port Authority is managed by a Chief Executive Officer, who is appointed to and released from that position by the Board of the Free Port, after coordination with the Minister of Transport.

A state policy board, the Latvian Port Council, coordinates the development and operation of all of the country’s ports. Chaired by the Prime Minister, the Port Council is made up of the State Ministers, the chairpersons of the city councils, and the chief executive officers of the three major ports (Riga, Ventspils, and Liepaja). The Port Council’s main responsibilities are to coordinate and assess the conformity of the Port’s long-term development plans and investments to Council directives and guidance. The Council manages a Port Development Fund, sustained by a 1.5 percent tax on all port revenues, for long-term infrastructure needs.

With facilities on both sides of the Daugava River, the Free Port controls a territory of over 18,000 acres (7,300 hectares), 6,000 acres (2,500 hectares) of which is land and 12,000 acres (4,800 hectares) of which is water. There are over 43,000 feet of berth space, and the Port can support vessels with a draft of up to 41 feet (12.5 meters). Total cargo throughput in 2005 was 26 million short tons (24.4 million tons), which is 54 percent of the Port’s 50 million short ton (45 million ton) capacity. The Port has over 1.9 million square feet (180,000 square meters) of warehouses, 19.3 million square feet (1.7 million square meters) of open space, 31,750 tons of cold storage, and 81.6 million gallons (309,500 cubic meters) of tank capacity. The Port also maintains a small boat basin for recreational vessels and a major ship yard. Once the home of a large fishing fleet, the Fishing Terminal is now used primarily for general purpose cargo.

Of all the cargo transiting the Port in 2005, dry bulk accounted for 61 percent, 25 percent was general cargo, and 14 percent liquid bulk. Individual facilities include a general cargo terminal, with throughput of 6.8 million short tons (6.2 million tons), and the Baltic Container Terminal, which handled 169,000 TEUs (twenty-foot equivalent units) and has a capacity of 300,000 TEUs. Container shipping in 2005 increased 10 percent over 2004, and has grown by 40 percent over the past three years. Maersk, MSC, DFDS Tors, Samskip, and UniFeeder lines make 10 weekly service calls. There are no direct shipments from Riga to the United States at present, and most U.S.-bound cargo passes through the European transshipment ports of Rotterdam and Felixstow.

In 2005, the timber terminals had a throughput of 166 million square feet (4.7 million cubic meters); their capacity was 247 million square feet (7 million cubic meters). The liquid bulk terminal had a throughput of 3.8 million short tons (3.5 million tons); the dry bulk terminals accounted for 16.3 million short tons (14.8 million tons); and the fertilizer terminal, with a capacity for 2.75 million short tons (2.5 million tons), recorded throughput of 1.6 million short tons (1.4 million tons). The volume handled by the coal terminal has tripled in the last three years, and it now has a throughput of 11.8 million short tons (10.7 million tons), with the United Kingdom as the main destination.

After a recent break in service due to a change in provider, there is again now regular ferry service between Riga and Stockholm, Sweden, and there is regular ferry service from the Riga passenger terminal to Luebeck, Germany.

Latvian law assigns navigation and safety responsibility in the major harbors to the Port Authorities, and in 1998, the Port of Riga completed a new Vessel Traffic Service (VTS) Center. With a commanding view of the river and port facilities, the VTS maintains an early warning system, an Automatic Identification System (AIS), and a Global Marine Distress and Safety System (GMDS). All vessel movements within the Port Authority area are recorded, and the VTS Center also manages and dispatches harbor pilots and coordinates tug boat and other harbor services. The Harbor Master and the VTS Center are also the central point for International Ship and Port facility Code (ISPS) interface with foreign vessels.

The Port Authority has a master development plan for the Port that includes better location and utilization of existing facilities, particularly the coal terminal, and the creation of new facilities for oil, cruise vessels, and ferry service, as well as upland development for large land areas. The Port Authority also plans to deepen the channel to 15 meters to accommodate the new 8,000 TEU ships currently being constructed.

Security, Counter-Corruption, and Non-Proliferation

It is axiomatic that to be successful, a modern port must have two basic, interrelated characteristics: it must be secure, and it must be competitive.

The team has reviewed Latvian legislation, including the relevant international conventions to which Latvia has adhered, as well as visiting various facilities within the Port area. Latvia has been a member of the International Maritime Organization (IMO) since 1993 and is signatory to 39 of 56 IMO conventions, protocols, and amendments addressing a wide range of maritime issues. Since it entered into force on July 1, 2004, the International Ship and Port Facility Security (ISPS) Code has been the internationally recognized standard for maritime port facility and ship security measures. The mandatory security measures, adopted in December 2002, include a number of amendments to the 1974 Safety of Life at Sea Convention (SOLAS), the most far-reaching of which is the ISPS Code.

The ISPS Code contains detailed security-related requirements for governments, port authorities, and shipping companies in a mandatory section (Part A), together with a series of guidelines for meeting these requirements in a second, non-mandatory section (Part B). It does not appear that Latvia has enacted national legislation implementing the ISPS Code or incorporated its requirements into the Law on Ports, or other existing legislation. However, it is not necessary that such legislation be enacted as long as the national government has provided guidelines for implementing the ISPS Code through the nation’s ports, even if it is simply to require that the Code be followed verbatim. This is what has happened in Latvia’s case. The Maritime Administration of Latvia Ship and Port Security Inspectorate is the Designated Authority (DA) responsible for the implementation of the ISPS Code for ships and port facilities. The DA has reported to the International Maritime Organization that Latvia is fully compliant with the ISPS Code. EU Regulation No. 725 requires all member states to implement the ISPS Code.

As a result of their visits to various sites throughout the Port area and from their meetings with numerous officials with responsibilities in or relating to the Port, team members were satisfied that the Port Authority is working toward ensuring that adequate security measures are in place throughout the Port. The responsible Latvian officials appeared to understand the importance of security in the Port and, in general, were aware of those areas where infrastructure and procedures needed improvement. Specifically, those officials listed as their current priorities: the construction of an Accidents Coordination Center (ACC); implementation of a centralized electronic access system; closed circuit television (CCTV) implementation and modernization; fence renovation; perimeter security system installation; and improved waterside security. (In the latter regard, the team noted that there was no waterside policing capability at the time of their visit. However, the team learned that recently-passed legislation envisions the establishment of a separate unit of the State Police with three patrol boats and responsibility to control the checkpoints, police the Port territory, and provide additional waterside control.) The large, sprawling area under the Port Authority’s control, various bureaucratic constraints, and the lack of adequate funds were the most frequently cited hindrances to faster progress in making the necessary changes and corrections. The team’s observations and suggestions for improving Port security appear at the end of this report.

As in virtually every other port in the world, the best antidote to possible corrupt practices is maximum transparency and clarity of regulations and procedures. Due to its intricate past, the Port of Riga and its governance, as well as its procedures, are indeed complex. This makes it difficult for those who want to conduct their business in an honest, aboveboard manner to do so, while providing opportunities to those who would take illegal or improper advantage of the existing system. It also complicates maintaining the needed levels of security. In governmental operations, and in government’s relationship with its citizens and private business interests, a high degree of transparency implies that laws and implementing regulations are clearly defined; there is clear communication among the government, regulatory bodies, the public, and business communities about the rights and responsibilities of both public and private interests; and there is accountability among all the parties for operating within the rule of law and the regulations. Increased transparency and making simplified, clearer regulations and procedures available to the public would, in the team’s judgment, go a long way toward hindering both the potential for and perception of possible corruption at the Port. The team’s specific observations and suggestions in this regard appear at the end of this report.

U.S. Government experts carefully assessed the Port from the non-proliferation standpoint in 2005. They found three drive-through radiation detectors in the Free Port area, at the ferry passenger terminal, the truck/container dock exit gate, and at the Vecmilgravis ferry terminal. Latvian Customs also has three personal radiation detectors. However, this equipment was not being put to optimal use in all cases, and opportunities existed for avoiding radiation screening. The present team confirmed these earlier findings and recommendations, while noting Latvia is not a major source country for radioactive material and therefore the risk that the Port would be the site of clandestine transit of radioactive materials was less of a concern relative to major source countries. In addition, as noted previously, there are no direct shipments from Riga to the U.S. and most U.S. bound cargo passes through Rotterdam and Felixstow, two ports that are active participants in the Department of Homeland Security's Container Security Initiative (CSI) and the Department of Energy's Mega-Ports radiation portal monitor initiative. Based on the 2005 assessment, the State Department-coordinated Export Control and Related Border Security (EXBS) program has procured an additional seventy-two personal radiation detectors and six radioactive isotope identifiers scheduled for delivery and training during May 2006. We therefore consider the provision of this additional detection equipment to be adequate. The U.S. Government, through its Export and Border Security (EXBS) program, has provided to the Latvian Government regular training and equipment transfers designed to strengthen the capacity of Latvian customs and agents and border guards to interdict dual-use goods. The EXBS program in Latvia and the Baltic States ends in 2006.

Economic Development of the Port

Since the Baltic States recovered their independence in 1991, there has been intense competition among the ports of Estonia, Latvia, and Lithuania. Tallinn, Estonia; Riga, Ventspils, and Liepaja, Latvia; and Klaipeda, Lithuania, are in close proximity to each other on the Baltic Sea. Each has developed a small degree of specialization and competitive advantage in some regard, but none has distinguished itself as a clear leader on the road to becoming the preeminent port in terms of overall size or in dominating a sector of the transportation market. None of these ports supports a large internal market. To a large extent they are transit ports for energy, raw materials, and wood products moving westward into the EU and to the United States, and, to a significantly lesser extent, finished goods moving toward Russia and the developing CIS markets.

The Free Port of Riga has experienced sustained growth since 1993. Cargoes have increased since then from 4.7 million tons to 24.4 million tons in 2005, and growth is expected to continue. Like its competitors in the region, Riga is overwhelmingly a transit port, with over 80 percent of the cargo transiting to or from Russia and the other CIS states. Outbound transit constitutes 64 percent of Riga’s total cargo turnover. Dry bulk cargoes (with coal the leading such commodity) are 60 percent of Riga’s cargo, liquid bulk (primarily petroleum products) is 14 percent, and general cargo is 25 percent. Containers, primarily for the Latvian market or inbound for Russia, were 7 percent of the cargo throughput in 2005. Containers, various metals, timber, coal, fertilizers, chemicals, oil products, and food are the main types of cargo handled in the Free Port. The Latvian Port Council has approved development plans for the Free Port through 2010.

Currently a range of Baltic ports are feeder ports served primarily from Rotterdam. They form a network of cargo ports on the Baltic Sea. Taken together with the substantial passenger and RO/RO traffic from Helsinki and Stockholm, these ports handle significant commercial activity. It needs to be determined whether or not Riga can establish itself as a hub of commerce in the Baltic region, and if so, how.

The Government of Latvia, the Latvian Port Council, and the Free Port all face important strategic questions about the future of the Port and the best ways to develop it. Without making recommendations or drawing conclusions about how the Free Port should define its role in the years ahead, the team does pose some questions about future scenarios for consideration. There are several critical questions. In what ways should the Port grow to produce jobs and revenues that benefit Latvia to the greatest extent? The Port should define a competitive advantage for itself in relation to other Baltic ports. It has ambitious plans for expansion and for moving key facilities closer to the Baltic Sea. There are plans to expand container operations in the Kundzinsala area and for a new coal terminal in the Krievu area. But what will distinguish Riga from the competitor ports?

It may make better economic and environmental sense to specialize dry and liquid bulk cargoes at a Latvian port other than densely populated Riga and focus instead on growing the container business there. Perhaps Riga could become a “load center” for a large steamship carrier. If Riga could accept fully loaded PANAMAX class container vessels, perhaps it could be the intermodal center for delivering containerized cargo into Russia, other CIS states, southeast Europe, and the Middle East. The possibility that Riga could be the terminus for intermodal cargo moving west from China to the United States and the EU states is also under active consideration, with Latvian officials describing such a cargo network as a “New Silk Road.” With the capacity of U.S. west coast ports to receive containerized cargo from Asia nearing its limits, maybe a westbound link via Riga to deliver containerized goods to the east coast of the U.S. could be established.

In posing these questions the team does not suggest that any or all of them point to economically feasible paths for the development of the Riga Free Port. They are offered only as suggestions for framing the discussion on the direction the Port might take to create competitive advantage in a very competitive environment.

Observations and Suggestions

As a result of its visit, the team has developed a number of observations and suggestions which may be of assistance to the Latvian authorities in mapping out the way forward for the Port of Riga. The overall goals are to raise the level of security, reduce the prospects for corruption, and increase the Port’s economic viability. The first items appearing below are general in nature; those that follow are more specific and operational.

The team did not meet with the Latvian Port Council, which is charged with coordinating the development and operation of all of the country’s ports. However, the team gained the sense that the three major ports (Riga, Ventspils, and Liepaja) had a large degree of autonomy in planning for their own development and, in fact, were competing against each other in some areas. While such independence and competition may be healthy in many respects, they can also lead to redundancy and waste, especially in a country as small as Latvia. The Port Council therefore may wish to exercise more active oversight of the three ports, to help ensure that each is making the most of whatever competitive advantages it may have, and that their growth and development are mutually compatible. Regarding the Free Port, the Port Council may wish to review the strategic plans for the Port to ensure that they set forth a strategy for long-term growth that is consistent with the interests of the Government of Latvia and of Riga and are economically viable.
The team found the organization of the Port Authority and the Board to be unique in its experience, and uniquely complex and opaque. Their organization and structure are too cumbersome and lack transparency. There are several different models that could be considered as alternatives. For example, a typical major US Port authority would have 5-7 officials elected directly from the local port community or 5-7 officials appointed by the local government. All of the board meetings are open to the public (with the exception of litigation, and security issues) with agendas published and announced before the board meetings. The press is invited to all meetings and public comments are accepted on agenda items. The team believes efficiency would be enhanced if the Board was reduced in size and the terms of Board members lengthened. Board meetings and minutes, except on the most sensitive topics, should be open to the public and the media. Performance audits on the Port Authority could be helpful in identifying areas where changes were needed and in increasing public trust in the Port Authority as an institution.
The Port suffers from a lack of clear ability to dispose of property, which impedes development.
Consolidating the Free Port in a smaller, more compact area downstream from Riga, as the Port Authority proposes, makes good sense from a number of standpoints, including greater efficiency, easier access, reduced environmental impact on Riga, and better security.
While many of the prerequisites for secure Port operations exist or are in the process of being met, the team notes that a master security plan for the Port as a whole is lacking. The Port Authority should develop such a plan that coordinates the efforts of all public and private sector parties that operate within the Free Port into a coherent, integrated, and layered security process for the Port. These plans should be carefully coordinated and developed within the framework of broader U.S.-EU cooperation and ensure conformity to U.S.-EU agreements that govern ISPS activities.
The Ministry of Finance, as the government organization responsible for the Latvian Customs Administration, should actively pursue development of a supply chain security program under the World Customs Organization’s “Framework of Standards to Secure and Facilitate Global Trade” and the EU’s implementation guidance.
The Ministry of Transport should study the transparency of Port operations and determine how best to ensure high levels of integrity among the personnel involved those operations. Focus should be on compliance by the Port Authority with Port regulations and the management of land within the boundaries of the Port. The Port Authority should also be evaluated in terms of how well it manages the integrity of its managers. This could be done within the structure of the Revised Arusha Declaration on Integrity in Customs.
The Port Authority should review and revise its strategic plans to ensure that they enunciate a strategy for the long-term growth and development of the port in a manner consistent with the interests of the Latvian Government, the city of Riga, and EU port development policies. The strategic plan is the basic instrument through which the government and the public can be informed of the Port Authority’s current and future goals, and by which the Port Authority can be held accountable for its performance in achieving those goals. Development of the plan should include a mechanism for input by members of the trade community. The plan also should spell out the Port’s capital needs and describe the proposed methods for financing developmental projects.

The following are some specific and/or operational observations and suggestions:

The Port Authority envisions having contiguous fencing around the entire Port, which is a nearly impossible task given the Port’s size, the cost, and other factors. It is more important to ensure that each facility has its own fencing, and that it is in good repair. Ideally, if the fencing were equipped with electronic sensors that were tied into the CCTV system, there would be less need for roving patrols, since the fence line could be monitored from the control room. If a sensor were tripped, an alarm would sound in the control room, and the closest CCTV camera could zoom in on the spot. Each facility should also have an access gate manned and equipped with a movable vehicle barrier to stop a vehicle from entering until the guard had allowed it to pass. It would be ideal for the Port eventually to be consolidated in a smaller area nearer to the mouth of the river and to include only Port facilities within its confines. Under this scenario, a fence surrounding the entire Port would be a viable option.
Latvian Customs should be encouraged to enforce existing laws to the fullest degree of their authority. For Example, Latvian Customs does not appear to take full authority vested in them under law to conduct searches.
Customs should conduct more frequent and higher quality examinations and record the results for risk analysis purposes.
Customs should make use of the selectivity controls of the customs computer system to identify more shipments for random examination and record the results for risk analysis purposes.
According to official policy, containers should be stacked with the doors facing each other. This should be done uniformly in practice.
The necessary physical structures and emergency response equipment need to be provided in the hazardous materials containment area.
Hazardous materials and first responder training is needed.
Training in advanced customs techniques is needed.
The Port Authority, in conjunction with the city of Riga, should consider developing a more aggressive marketing program for the Port, in particular, possibly marketing “home port” services to cruise ship and ferry lines.
Baltic Container Lines (BCL) should formally assess its operations against Customs-Trade Partnership Against Terrorism (C-TPAT) standards and take any actions to meet C-TPAT requirements.
Customs inspectors need to be given greater freedom to make front line decisions on passenger and cargo examinations. Also these decisions and the resultant actions need to be supported, not criticized, by their supervisors.
Latvian Customs officers undergo six weeks of initial training. Customs also possesses suitable equipment and has a proper legal infrastructure to perform their duties. Latvian customs expressed an interest in future training on risk assessment.