An address by the Vice Chairman of the Kharkiv Regional State Administration Y.A. Sapronov at the World Forum of air carriers and airports

Дата публикации: вторник, 8 июня 2010

Dear participants and guests of the forum!


Ladies and gentlemen!

I am sincerely glad that Kharkiv has become the first city in the CIS which hosts the World Forum of air carriers and airports (Routes CIS).

The fact that it is Kharkiv that gathered the heads of all 260 airports of the CIS, representatives of foreign airports as well as airlines from different countries of the world is evidence of potential, which our region possesses in the sphere of international aviation business, as well as the result of tremendous effort made by business and authorities of Kharkiv Region in this direction.

I would also like to express my special thanks to the President of the DCH Group of companies Alexander Vladlenovich Yaroslavskiy for dynamic development of Kharkiv airport as part of preparation of the city for Euro 2012.

Dear Sirs, I am convinced that for most present there are hardly any secrets in this industry because all of you are real professionals.

That is why I will dwell on our understanding of partnership between the state and business aimed at dynamic development of the airport business.

It is hard to dispute the fact that Ukraine has a great transit potential, confirmed by the technical assistance programme of the European Union TACIS, where experts marked out the perspectives ofseven major regional airports, with Kharkiv among them.

European airspace is oversaturated. Development of international airports in major Ukrainian cities is an opportunity to partially reduce the burden on the European sky, on the one hand, and on the other hand, this is an element of intensification of business and economic activity in Ukrainian regions, which is the primary task of government administration.

We understand that the airport business as such is increasingly becoming a “pillar” in the development of the aviation industry. A characteristic trend in the development of airport activity in Europe in recent years has become the focus on improvement of commercial return of the airport, the most complete realization of its market potential. Financial results of the airport activity come to the foreground along with production performance. Thus, on the one hand, the airport activity is considered as a full-fledged independent business, aimed at generating profit. On the other hand, it provides the solution of state tasks in the development of market and transport infrastructure, and the state in a varying degree retains control over it.

This feature complicates the solution of commercial problems which owners and managers of enterprises are facing. In particular, the solution of business tasks requires a cost reduction and revenue growth through introduction of efficient technologies,  attraction of qualified staff, modern equipment and other resources necessary for business development. In other words, this requires large and long-term investments, whereas standard solutions (banks, investment companies, etc.), in this situation, can be applied with significant reservations.

Quite often investors do not want to undertake political risks and to solve socially important tasks of the state at their own expense, believing that for their funding there exist taxes and the state budget.

In real conditions of the effects of the global financial crisis, limited budget, Ukraine becomes the owner of too many assets in order to exploit them on its own, in full volume and with an appropriate level of efficiency.

On the way of the airport to improve the profitability, there arises a barrier of lack of resources and high political risks. The situation is complicated by the enterprise’s lack of liquid assets necessary to provide the required amount of loan, and bank interest rates in Ukrainian financial institutions exceed the European ones in 4-5 times. In its turn, the territory and part of the property of any airport are unprivatizable, and most of the equipment is specific and low-liquid. In many cases, the rights for assets of an airport are blurred among several owners, which complicate the negotiation process and increases management risks.

Despite the fact that the global air traffic crisis has not so strongly influenced the dynamics of passenger traffic in Ukraine, it has clearly demonstrated to the potential investors high commercial and political risks associated with investments in the aviation industry. Many market participants have adopted the opinion of the need to increase the state participation in the development of air transport and, in particular, provision of guarantees for investment transactions.

So, I see two main challenges in this area:

The first is reorientation towards a private investor.

The second is creation of an optimal mechanism of interaction between the state and investor at the airport complex.

One solution to these problems can be an investment contract between the state and private commercial companies, which will distribute risks, responsibilities, powers and revenues arising during the establishment and operation of the airport as a whole or certain objects of its infrastructure. In the world practice this form of cooperation is normally called public-private partnership. Partnership allows you to use all available resources of the parties to improve the quality of airport asset management and to fully realize its market potential.

An example of such a successful and mutually beneficial public-private partnership is the airport reconstruction project which is being realized in Kharkiv.

Today in Ukraine it is the most successful project in the sphere of airport business.

And now I would like to look at the figures to reveal the basis of our cooperation in more detail. So, with the help of the state budget funding from 2008 to 2010 it has been completed:

– Construction of apron and aircraft parking areas (80% readiness).

By 2012 it is planed to build:

– A new runway, 2500 meters length, which will allow accepting aircraft of such class as Boeing 737;

– A new air traffic control tower and a new rescue station;

– Replacement of the light signal system and the system of aircraft landing aids.

At the same time,  with the help of the investor’s funding from November 2008 to June 2010 it has  been completed:

– Construction of a new passenger terminal (80% readiness);

– Reconstruction of the airport landside and construction of new parking spaces (75%  readiness).

And until 2012 it is planned:

– Restoration of the existing terminal;

– Construction of a temporary reverse terminal;

– Complete modernization of airport infrastructure;

– Purchase of special transport.

The new passenger terminal and the renovated existing one will allow increasing the passenger traffic capacity of International airport “Kharkiv” from 100 to 650 passengers per hour. And during the final part of Euro 2012 the use of the temporary terminal and simplified procedure of border and customs control will allow to increase the passenger traffic capacity of the airport to 2,5 thousand passengers per hour.

According to the new version of the State target programme of preparation for Euro 2012, until 2012 Kharkiv airport will receive funding from the state budget at the total volume of 736.66 mln UAH, including 527.4 mln UAH in the current year.

This shows clear understanding of the Government and regional authorities of the complexity of a range of problems and importance of promoting the development of the industry. Besides, it is necessary to create the conditions for reorientation of airports from budget funding to private investments. I believe that the scheme of public-private partnership, which has been tested in Kharkiv, is appropriate for application primarily at those objects of the regions, which will be hosting EURO 2012. This will subsequently lead to structuring the network of all Ukrainian airports.

On the path to success there are a number of unsettled problems. In my opinion, the main reason for insufficient use of transit potential of Ukraine as a whole, and Kharkiv region in particular, is an unsystematic interaction between the state and business. For an investor first needs an understandable and transparent fiscal policy. This, for example, applies to legislative fixation of the optimal tax rate on land for airports.

We are also prepared together with the Cabinet of Ministers of Ukraine to brisk up the work on issues related to the mechanism of return of investor’s funding, determination of the shares each party receives when distributing income, establishment of rental rates and mechanism of their review.

As one of the options of finding optimal managerial decisions in this industry we are regarding concession schemes. The main advantages of these schemes are flexibility and complexity, which allow satisfying the interests of all the stakeholders:

– the State – in development and effective management of the enterprise without significant budgetary expenditures, and reserving a number of regulatory functions (control over pricing, safety, structure and quality of the services provided);

– private investor – in the ability to implement the investment project, risk sharing and securing sources of return of the invested funds;

 consumers – in the guaranteed services of high quality and affordable price.

An important aspect of implementing the concessionary scheme is that it allows to achieve high performance in management of an airport complex, as well as to derive the maximum possible income out of the existing market potential without consolidation of all the assets in the hands of one owner. Futhermore, it enables enterprises to run business under the same market conditions and avoid the disruptive effect of airport administration on decisions taken.

Separation of a number of airport services as certain types of business and their transfer into management by the most competent specialists with the necessary investment opportunities allows most effective realization of the service market potential in each airport and maximization of the total revenue of an airport complex.

Despite the lack of an adequate legislative basis, the logics of the concession agreement can be applied when solving the problems of development of airport complexes even today.

Specifically, I will dwell upon the issue of development of the aircraft building in our region. As you know, Kharkiv is one of the largest centres of medium-haul passenger and transport aircraft building. In the current situation, we have high hopes for the last agreements of the Presidents of Ukraine and the Russian Federation directed towards the development of cooperation in the sphere of aircraft building, which will undoubtedly have a positive impact on the development of the aviation industry as a whole, increase our competitiveness in this sphere.

In conclusion, I invite you to cooperation. Our region is open for investments and new projects, and we are determined to revive the investment attractiveness of Kharkiv region, build the confidence of private investors and create a most-favoured-investor-status for them. Our philosophy is complete openness to dialogue with business.

I am sure that this meeting is the first link in the chain of fruitful long-term cooperation. And the development of airport business is a kind of a “window” for the arrival of investments to various sectors of economy of Kharkiv region.

I wish you fruitful and effective work.

Thank you for your attention.