PhD Ivan Herak, member of the ACI Management Board, interview for Glas Istre: Investments and extension of concessions for all marinas in the system

PhD Ivan Herak, member of the ACI Management Board, interview for Glas Istre: Investments and extension of concessions for all marinas in the system

PhD Ivan Herak, member of the Management Board of ACI d.d.: “More than HRK 750 million has been invested in ACI’s marina system over the past 15 years, far more than the HRK 200 million planned at the time. The main prerequisite for the further development of ACI is the extension of concessions for all marinas in the system.”

 

According to the valid concession contracts, all ACI marinas have a concession until the end of 2030, i.e. less than eight years, with the exception of the Slano marina and the anchorage. The duration of the concession is the factor that most limits the development potential of ACI. Namely, after the initial growth and take off in the 80s of the last century, there followed a war period and many years of loss-making business, due to which the infrastructure and facilities of the marina were largely neglected. In order for ACI to be able to compete with the marinas in the Mediterranean and the Adriatic in terms of quality and range of services, it is necessary to make substantial investments, the profitability of which in the current conditions is highly questionable, said PhD Herak in an interview for Glas Istre, which has been brought below in its entirety.

Author: Robert FRANK

Photo: Danilo Memedović

The management of ACI d.d. made a decision last week on the selection of a strategic partner for the creation of ACI’s Sustainable Development Strategy for the period from 2023 to 2027. At the same time, the Institute for Tourism delivered to ACI the Audit of the market and financial justification and strategic opportunity of the ACI AIR project, the project already encountered numerous negative reactions from the public at this stage. At the end of last week, negotiations regarding the amendment of the collective agreement for ACI d.d. were opened between the ACI Management and the negotiation team of the ACI Trade Union. At the end of the past week, things got complicated regarding the request for the extension of the concessions that the ACI Management submitted to the competent ministry in 2020. All the aforementioned issues are in the domain of work for which Ivan Herak is responsible as a member of the Administration for Finance, Corporate Law and Human Resources.

– To begin with, where is ACI today? The figures from the financial reports are very good indeed. Is everything really so idyllic, or does ACI create satisfactory added value through its operations?

– ACI d.d. since 2011, has been operating with a profit and records continuous growth every year, which created the prerequisites for further development. In the business year 2021, ACI achieved HRK 215.6 million in total revenue, while EBITDA amounted to HRK 83.7 million. The company’s balance sheet is more than exemplary since ACI’s assets have only 20 percent of their sources in the Company’s credit obligations, which are also favourably structured. Likewise, all indicators of the Company’s operations, such as the profit margin, the coefficient of return on assets and the financial stability of the Company, are positive signs. The cash flow is also favourable, and the Company is able to fulfil its due obligations at any time.

 

Obstacles to faster development

– Nevertheless, the media often mention numerous problems that ACI faces in its operations. What are the problems? Is the level of products and services offered by ACI today satisfactory?

– ACI d.d. today is exposed to a series of problems that represent an objective obstacle to faster development. Identifying problems and finding solutions is a prerequisite for further development. The main obstacles to the further development of the system are the limitations arising from the valid spatial planning documentation, then the duration of the concessions for the economic use of the nautical tourism port-marina, and the issue of registration of maritime property and the legalization of built objects. Furthermore, the Company has an inadequate structure and quality of moorings as well as facilities on land. An additional problem is human resources, primarily the age structure of employees. In the end, the entire business of the Company rests on IT solutions, which even today cannot meet all the business requirements, both of individual marinas and of the system as a whole. In conclusion, the state of the product is not satisfactory, which is indisputably visible from the structure of ACI’s income, in which, with 75% participation, the income from renting berths dominates.

– When creating the project task required for the creation of ACI’s Sustainable Development Strategy, you defined the work guidelines, that is, the strategic goals of ACI d.d. What are the goals or guidelines?

– Taking into account all of the above, the work guidelines, that is, the strategic goals of ACI d.d. are extending the duration of the concession and expanding the scope of concession areas, registration of maritime property, legalization of built objects and resolution of property-legal issues, improvement of the quality of service provision, diversification of business, improvement of computerization of business, implementation of quality, environmental and energy management systems, restructuring of human resources and not at the end, new acquisitions.

– What has the Management Board of the Company undertaken or is undertaking when it comes to extending the period of use of concessions?

– According to the valid concession contracts, all ACI marinas have a concession until the end of 2030, so less than eight years, with the exception of the Slano marina and the anchorage. The duration of the concession is the factor that most limits the development potential of ACI. Namely, after the initial growth and take off in the 80s of the last century, there followed a war period and many years of loss-making business, due to which the infrastructure and facilities of the marina were largely neglected. From 2007 to the present, more than 750 million kunas have been invested in the system, far more than the 200 million kunas planned at the time, in order to bring the marinas to an acceptable level of arrangement that the specific clientele is looking for. However, in order for ACI to be able to compete with the marinas on the Mediterranean and Adriatic in terms of quality and range of services, to be able to meet all environmental protection standards and ensure the desired level of safety, it is necessary to make substantial investments, the profitability of which in the current conditions is extremely questionable. Therefore, the main prerequisite for the further development of ACI is the achievement of an extended term of concessions for all marinas in the system.

– Drafting of the Law on Maritime Property and Sea Ports, which is of crucial importance for ACI, is underway. What are the expectations of ACI in relation to the aforementioned law?

– Essentially, we expect the aforementioned law to valorize concessionaires’ investments. Otherwise, if the law stipulates, for example, that the concession may or may not be extended under the given conditions, a whole series of questions will open up, such as the legal security of the investments made, all of this in relation to the fact that there are no known criteria by which decisions are made whether to extend someone’s concession or not. No less important is the issue of ensuring the equal position of economic entities on the market, given that it is unacceptable that for the same investments one entity can be granted a concession extension and another cannot.
Namely, the Companies Act stipulates that the Management Board must run the Company with the attention of a good master. Likewise, ACI is a joint-stock company listed on the stock exchange. This means that the Company’s Management Board and the Supervisory Board are accountable to the shareholders for their decisions. Consequently, we must be sure that the investments we plan must be amortized for the duration of the concession. Also, in this context, it is important to mention the goodwill that ACI brings to each of its marinas with its standards and management, and how it creates the brand and image of each individual marina that is recognizable to guests and creates an additional attraction. I mention this because I am of the opinion that concessionaires should also be recognized for the value of goodwill. All of the above should be taken into account when adopting new regulations that regulate issues of concessions on maritime property.

Most of the income comes from moorings/berths

– In the project assignment that you defined for the purposes of creating the ACI Sustainable Development Strategy, you also nominated business diversification as one of the Company’s priority goals. What exactly did you mean?

– In the further development of ACI d.d. business diversification is imposed as one of the basic conditions for business stability and raising the level of income. Namely, although in the past the majority of services in marinas were carried out independently by ACI, today most of the accompanying content, i.e. secondary activities, primarily catering and service activities, charter services, agency services, shops, etc., are performed by other natural and legal persons in various forms. business cooperation. The Company itself mainly relies on the provision of services for the use of moorings, raising and lowering vessels, parking, washing vessels and a negligible part of other tourist services. The above has resulted in a revenue structure in which 75 percent is revenue based on moorings, and the Company itself thus becomes extremely dependent on the movements of the nautical tourism market and underutilizes the economic and tourist potential of the destinations where certain marinas are located.
Consequently, business diversification with the aim of increasing income, creating new jobs and improving the quality of service provision is one of the key factors of future development. It implies the development of new, as well as existing services that have been neglected until now for numerous reasons. After the market analysis, taking into account the existing human potential, financial resources and previous experiences, the Company will direct part of its resources, financial and human, to the development of hospitality (hotel industry) and commercial activities (retail), charter tourism and the development of service activities.

– What do you think about the development of the hotel business within the existing ACI system?

– Considering the attractiveness of the destinations where most of the marinas are located, the spatial capacities of micro-locations within the marinas, traffic accessibility, as well as the availability and sufficiency of communal infrastructure, a large number of ACI marinas are ideal places for building hotels. Depending on the location, it is possible to build small boutique hotels, with a capacity of 25 to 50 rooms, category 4 stars. As potential locations for the futura ACI hotels, there are marinas in Umag, Pula, Opatija, Cres, Supetarska Draga, Vodice, Skradin, Trogir, Milna and Korčula. Investing in hotels would undoubtedly result in an increase in the Company’s income and profit, the creation of new jobs and an increase in the Company’s market capitalization.

– How far have you reached with the announced conversion of ACI’s office building in Pula into a boutique hotel?

– In 2018, ACI created a concept project, which essentially represents the conversion and reconstruction of the unused spaces of the marina building into an exclusive boutique hotel. It is planned that on the site of today’s “Torta”, I would like to emphasize this, in the dimensions of the existing ACI building, the Company would invest in the construction of a boutique hotel, which would have commercial facilities, a reception, a coffee bar, a restaurant, sanitary facilities and administrative offices on the ground floor. of ACI. On the first floor of the hotel, there would be 14 hotel units, each with a terrace, while on the second floor there would be another 12 hotel units with terraces and a view of the Pula Arena. A Sky bar with an infinity pool would be located on the roof of the building. In addition to the decoration of the central building, the conceptual project also foresees the extension of pontoon piers C and D and the reconstruction of the associated infrastructure. The overall project aims not only to raise the category of the marina to 4 anchors but also to raise the quality of services in the Pula marina in general so that they can adequately respond to the requirements of our sailors.
When it comes to the final implementation of the project, it is first necessary for the Pula City Council to adopt minor amendments to the Urban Development Plan, for which the mayor of Pula promised us full support. A condition for creating the main project, obtaining the necessary permits and finally the construction itself is the amendment of certain segments of the Ordinance on the Classification and Categorization of Ports of Nautical Tourism.
It should be noted that the project fits perfectly into the intended revitalization of Pula’s Riva, fully following current urban trends that favour the concept of renovating existing accommodation locations and capacities within the built-up areas of the city, i.e. trends that oppose the aggressive construction of tourist facilities in undeveloped areas of the city. Saturation of valuable localities is what Pula needs the least.
Complementary to the aforementioned project is the Pula waterfront development project, which includes a part of the maritime property managed by the Port Authority of Pula, the maritime property included in the concession for the ACI marina Pula and a part of the property that is in general use managed by the City of Pula. ACI recently signed a Memorandum of Understanding with the aforementioned stakeholders, in which we expressed our intention to be partners in the aforementioned project.

Own charter fleet

– The establishment of a charter fleet owned by ACI also announced?

– Croatia is currently the leading charter destination in the world, and charter tourism is the most dynamic Croatian tourism product with constant and stable growth rates for the last 15 years. The development of its own charter fleet, considering the main activity of the Company and the existing market framework, is imposed as a logical choice that will contribute to business diversification. Taking into account trends, but also previous experiences with the development of this tourist product, in the initial three-year phase, work will be done on developing a charter fleet made up exclusively of vessels under management. More precisely, charter management programs for external partners are planned, which would include mediation during the purchase, financing and insurance of vessels, as well as mooring services, vessel reservations, crew changes and vessel maintenance. Potential bases of the future charter fleet are marinas in Dubrovnik, Trogir, Vodice and Pula. Depending on the capacities of the existing marinas, the system can establish three to four charter bases, one in the extreme south, one or two in the middle and one in the northern Adriatic with a maximum capacity of 300 charter vessels, i.e. 10% of the charter market.

– For the purpose of building the port of nautical tourism in Rijeka (Porto Baroš), ACI together with the company Gitone-Kvarner founded the company ACI-Gitone, which will invest 365 million kuna in the construction of the mentioned port, which represents the largest investment in nautical tourism in the history of Croatia. Behind the Gitone-Kvarner company is the German group Lurssen, the world’s leading manufacturer of megayachts, which generates an annual income of eight billion euros. At what stage is the project and when can we expect its completion?

– The project is certainly among the most important projects in the recent history of Rijeka, not only because of the expected economic benefits and the fact that Rijeka will be positioned on the nautical map of Croatia but primarily because of the transition of the archaic, inherited structure of the Rijeka economy will be initiated through the project. Namely, in addition to the construction of the mentioned marina, ACI is ready with the Lurssen Group as a strategic partner to expand the marina and all the facilities that go along with it to the part of the Passenger Port, on the stretch from Riva Boduli to Fraceshijev ghat.
I would dare to say that this project represents a kind of litmus test for Croatia, not only because of the importance of the project for Rijeka but also because of the fact that the project was realized primarily thanks to the Government. Likewise, the stakeholder in the project is ACI, which is 78 percent owned by the Republic of Croatia, while the other stakeholder is a respectable German company that, in addition to the aforementioned investment and purchase of the majority package of Liburnija Hotel Opatija, intends to invest in other projects in Croatia. All this places a huge responsibility on the ACI Board, and therefore we intend to deal with the project very operationally on a daily basis. Ultimately, it is an investment that takes place in our country, and it is expected that the partners expect us to pull the project through the tangled tangle of our bureaucracy. When it comes to deadlines, we predicted that the location permit could be obtained by the end of this year, while the marina should be operational by the end of 2024.

– A lot of dust was raised in the public about the intended investment of ACI in the procurement of seaplanes. What is your opinion on this issue?

– The ACI AIR project, which was started by the previous Administration, represents the expansion of the basic activity of ACI to the provision of commercial seaplane passenger transportation services. Since the provision of the mentioned services should be associated both with a significant investment (acquisition of aircraft, construction of land/sea infrastructure – pontoons/sea airfields, service centre), and with certain market risks (expected volume of demand, financial profitability, etc.) and personnel-organizational and strategic challenges, the current Management of ACI ordered the creation of a document that would objectively and expertly assess not only the market and financial potential of this complex development-investment undertaking but also its long-term business justification in the context of possible external economies/diseconomies relevant to ACI’s operations in its core business. Simply put, the viability of the initial project idea had to be questioned from the perspective of both the physical volume of potential demand and the price-operational assumptions of the initial model. In nature, the aforementioned review of the market and financial justification and strategic opportunity of the ACI AIR project also represents a kind of review of the findings and recommendations of the document “Airline Business Plan for the Transportation of Passengers by Seaplane”, material prepared by KPMG Croatia in April 2020.

Seaplanes on hold

– What did the profitability study show?

– The study concluded that the expected business performance of the ACI AIR project indicates the fact that the cost of the initial necessary investments could be properly serviced during the entire observed period. The robustness of predictable business performance was additionally tested through a sensitivity analysis, whereby five key risks were specifically considered – the achievement of business income levels below those shown in the base scenario, the impossibility of achieving the planned income based on the leasing of two seaplanes during the winter months, the increase in operating costs due to fuel price increases on the global/Mediterranean market during the first three years of foreseeable operations, a 30 percent increase in gross salaries of flight personnel during all considered years of foreseeable operations, and finally an increase in the total required investment by 10% compared to the base scenario.
The aforementioned sensitivity analysis indicated a fairly satisfactory resistance of the project to the tested risk factors, but it also showed that the project is quite sensitive to a decrease in business income.

– So is ACI moving into that project?

– It is not possible to give a definite answer to that question. At this moment, I am talking about the reflection of the majority part of the Administration, the aforementioned finding is only the basis and assumption for further questioning the economic expediency of the project. Namely, although the revision of the project was carried out professionally satisfactorily, there is a great reserve, not to say scepticism, when it comes to assessing the level of potential demand for seaplane transportation services. We do not have any experiential knowledge in that part, and what is worse, through primary research in the field it is almost impossible to investigate and at least approximately quantify any credible parameters of demand for this type of service. Therefore, we believe that the project could come to life exclusively in a phased consortium model of public-private partnership, in which the relative majority shareholder would be ACI, and all our further activities towards the Government and potential partners will go in this direction. We are of the opinion that as a company of strategic importance for the Republic of Croatia, if you will and as members of the Board proposed by the Government, we must act responsibly. Any ill-considered decision would cause damage to the Company as well as enormous reputational damage to both ACI and the Government. When we talk about the ACI-AIR project, we should also take into account the fact that ACI already launched the “ACI Sail” project two years ago, which should demonstrate its market valorization and purpose of existence and at the latest year, given that in the previous two years, due to covid circumstances, this was not possible.

– A few days ago, the ACI Management Board started negotiations with the negotiation team of the ACI Trade Union regarding changes to the collective agreement for ACI d.d. with the aim of increasing salaries and ensuring better working conditions for ACI employees. How are the negotiations going and what can ACI employees expect in the end?

– The issue of workers’ rights should first of all be seen in a wider context. Namely, for a long time in the world, including in Croatia, there have been local and global trends that generate the problem of a workforce deficit in tourism. The first trend is the growing need for an increasing number of employees in tourism, as a result of the growing share of tourism in GDP. The second trend is the decreasing base of potential employees, which is caused by the decline in the birth rate and the ageing of the population, while the third factor represents the great impact of migration as a result of the globalization of the economy. These are large numbers, given that, for example, in Austria, 29 percent of those employed in tourism are foreign nationals, while in Luxembourg it amounts to 60 percent. This problem will escalate from year to year, given that, according to publicly available data, in the next 5 years Switzerland, Austria, the Netherlands, Spain, Sweden and France will have greater needs for labour in the tourism sector than European countries. All these countries have a significantly higher GDP per inhabitant than Croatia and therefore can offer our citizens significantly more favourable conditions. Switzerland and Austria will certainly be especially attractive to Croatian workers, due to their geographical proximity and the fact that they have a significantly higher GDP per capita than Croatia.

Within such circumstances, related to the issue of changing the Collective Agreement for ACI d.d. with the aim of increasing salaries and ensuring better working conditions, my colleague Ostrogović and I opened negotiations with the negotiation team of the ACI Trade Union. I can only say that the position of the ACI Management is already that the salaries of the ACI employees should be increased, and therefore we have started the preparation of a comprehensive analysis that will contain a benchmark of companies in the same or similar activity, i.e. companies in the same or similar legal status as ACI. We will especially focus on companies of particular interest to Croatia. We will also analyze where ACI’s salary policy is today, whereby we will take the ten largest Croatian marinas as a benchmark and create a comparative analysis of average salaries in relation to income per employee. We will also create a trend analysis that will contain the movement of average salaries from the year of the last adjustment of salaries in ACI until today. In particular, we will analyze where ACI’s wage policy is today in relation to the increase in the cost of living, which will contain a projection of savings during the past period, more specifically, how much the sum of wages would be today if it was harmonized with the average annual consumer price index since the year of the last wage adjustment in ACI – until today. And finally, through a simulation model of several potential salary increase options, we will look at the impact of the aforementioned increases on the Company’s business results. Based on all analyzed parameters, the Management Board will make a decision that it can stand behind.

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