Банкеръ Weekly


Who Enjoys Huge Profits from Black Sea Airports?

The ambitions of the current government of Bulgaria for re-industrialization of the country one would say that the state is able to manage its assets so as to profit from them. In reality, however, it is exactly the opposite. Examples are abundant and one of newest is Sofia Airport. Its privatization has long ago been discussed, money for analyses has been spent, concession strategies have been written, but nothing has happened. Meanwhile, remaining in the hands of the state, the largest airport in the country literally fell into an air pocket and is already off competition not only in the region, but also in the country.

Only eight years ago, the airports in Varna and Bourgas, even taken together, could not dare compare themselves with the capital, when it comes to passenger numbers, revenues and profits. Only after their concession to consortium Fraport Twin Star Airport Management, the situation became quite different. This has been showed by a report of the Supreme Audit Office.

Indeed, the biggest deal for public-private partnership in 2006

started off very difficultly

"We plan to invest 23 million euros in immediate improvements in the first year of the contract up to 2009 and the investment will reach 95 million euros overall, while for the entire 35 years - it will come to 403 million," said at the signing of the concession agreement, the then Chief CEO of Fraport Twin Star Airport Management, Andreas Helfer. The promises were that over the next three years - by 2009, they would build new terminals that will cost a total of about 100 million euros. A major investment was intended for Burgas, where the building had to meet the standards of serving 3.5 million people a year, or more than double its capacity by then.

Instead of new constructions, the same intentions were repeated by the company in early March 2009. There was only difference in the amount for the construction of the new passenger terminals - from 100 million initially promised the sum declined to 72 million euros. New terms were set under which their construction would have to be completed in 2011. These new deadlines were also not met and it was only at the end of last year that Varna and Burgas received the coveted terminals.

After all, the documentation viewed by the BANKER showed that Fraport Twin Star Airport Management has been sanctioned by the controlling body in the Transport Ministry with penalties of 5,637,746 levs. The concessionaire tried to get away, by suggesting not to pay for the delay but to invest an additional sum of 16.8 million euros. The Transport Ministry has agreed that the new investment matches the size of the breach by 2010, but did not accept to free the concessionaire from payment of the penalties.

In any case,

the amount in question has not been paid to this day

In particular, none of the ministers in charge - Mutafchiev (from the tripartite coalition), Alexander Tsvetkov and Ivailo Moscovski (GERB) and current Daniel Papazoff did not accumulate the amount from the bank guarantee for the execution of the concession contract.

Realistically, even before the construction of the new terminals the people from Fraport Twin Star Airport Management had nothing to complain about. Obviously they had done their calculations quite well, since they took over both airports of the seaside resort directly in the middle of the tourist boom in Bulgaria. And even the financial crisis, that came locally in 2009, could not hurt their business. The number of passengers at Burgas Airport jumped from 1.8 million in 2007 to 2.5 million in 2013 and the served aircraft increased by 18 percent. In Varna there really was some decline, but in 2012 a growth of 3.35% was registered which was sustained during 2013, and the number reached 1.3 million passengers.

"For the first time in six years there has been a visible trend of increasing passenger traffic at the Northern Black Sea coast of Bulgaria," noted in their report and the Supreme Audit Office.

With passengers came higher earnings

While airports were state-owned, their revenue for 12 months totaled 50-60 million levs. "The year 2007 was the first full calendar year of the concession period during which the concessionaire reported total revenue of 80,829,533 levs. During the period 2008-2009, there was a trend of reduction of all types of income, and the decline was 1 million compared to 2007 while for 2009 the decrease was over 10 million levs, compared to 2008. This can be explained by the economic crisis in the world, giving a negative impact on the activities of global aviation and the results of the Bulgarian seaside tourism. During the following 2010 a trend of gradual recovery in revenue began and for 2011 and 2012 and their amount exceeded that of 2007", stated the Supreme Audit Office.

To sum up, for the period from 2007 to 2012 the proceeds of Fraport Twin Star Airport Management came to almost half a billion levs. The clearest indicator as to how they are doing their job is called non-aviation revenue. This amounted to 70.7 million levs, as almost 100% of is has been formed from the rental of retail outlets and advertising space. Only for 2012 and the money from this activity came to 15.5 million levs (data sheets for 2013 are still missing), while Sofia Airport registered only 4.6 million levs.

With good income, of course, profits increase, too. During the first four years of the concession (2007-2010) they are commensurate with the period before the two airports passed into private hands, and stood at around 16 million levs. But in 2011 reached 22.168 million levs, and in 2012 - 24.29 million levs. It will be interesting to see what they have generated as a profit in 2013, which experts say, was the strongest tourist year ever.

Against the background of these results a quite logical question arises:

What does Bulgaria win

out of this concession? According the signed in 2006 contract Fraport pay the state 3 million euros as a one-ff concession fee. From then on, the company contributes to the budget each year 19.2 per cent of all revenues associated with both seaside airports. So by the end of the last year for which there are accounting details (2012) the Treasury absorbed a total of 92,250,502 levs from Fraport. The smallest fee paid was in 2009 - 13,297,875 levs, and the highest was for 2012 17,212,520 levs.

More or less what everyone can tell, is that the state initially missed the opportunity to better protect its interest. The contract set clause that in case of adverse economic or other events the revenue of airports in 2003 shall be adopted as the basis for the formation of the concession fee (57 million levs) adjusted to the annual rate of inflation. The algorithm does not reflect the cumulative inflation for the period from 2002 to the time of calculation, and takes only the data for the respective year. And if there is deflation, as is the situation now, Fraport can pay even less than that.

In analyzing the reports submitted by the concessionaire the auditors of the Supreme Audit Office also found that the information in them is not at all detailed. Revenues generated by various types of taxes, from ground handling and non-aviation activities are not specifically mentioned. The accuracy of the data in the reports and their compliance with the information from the accounting system of the concessionaire was not controlled, i.e.

the state is blindly trusted Fraport

for the figures and checked only whether the percentage of the concession fee is calculated correctly.

In practice, the payment schedule is as follows: at the maturity dates Fraport notifies in writing the Ministry of Transport on the amount of the generated income for the year in order to calculate the concession fee. Information provided by the concessionaire, however, was in the form of the mentioned references and can be easily manipulated. It is true that the auditors have found no specific violations, but the irresponsible attitude of the state authorities is obvious.

In the end we can say that the large investments for the concessionaire have already been made. From now on over the next 27 years it remains for the company to maintain what has already been built and enjoy the profits from their activities. Having the new terminals and with regard to bolder predictions about the end of the crisis, these profits are just set to grow.

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