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To sell Antonov: will private investors save Ukrainian aviation industry

13.05.2013

Author: Ekaterina Grebenik
Source: Transport Strategies Center

The government gets back to corporatization of aviation enterprises. It follows from the economic development program for 2013-2014, approved by the Cabinet of Ministers in late February. According to the program, the state holding company «Antonov» shall be incorporated in late 2013. Its authorized capital will be formed by transferring 100% of shares in the companies «Plant 410 Civil Aviation», «Antonov» and «Kharkov State Aircraft Manufacturing Company» after their corporatization. As stated in the motivational part of the document, it will contribute to financial recovery and create conditions for increasing the production rate of the An aircraft. The idea has arisen five years ago, and it was implemented in some government programs. Moreover, privatization was seen as the next step. It has not been realized due to bureaucratic acrimony, constant change of power in the country and other political, not economic reasons, experts believe. Thereto, many aviation countries of the world are still interested in our aviation industry – despite almost complete stop of domestic aircraft manufacturing.

Hope still alive Corporatization and attraction of private capital into the sector is the only way to restore the aviation industry, says Oleksandr Kiva, Deputy General Designer of SE «Antonov». «At present, all industry players have to work in a very tough competition in world markets. Our operation as a public enterprise limits significantly our abilities to attract investment capital, but, it does not release us from responsibility for the results. There is no successful public companies in the aircraft industry in any country of the world», complains Kiva.

In his opinion, the decision on privatization of the industry enterprises has arisen long ago, its implementation is still hampered by lack of coherent management in the government. «I think that now, when the parliament, the government and the President cooperate, it becomes much more realistic to implement such plans», he added.

The experts believe that Ukraine still has high aircraft construction potential. «We have largely managed to maintain a full aircraft construction cycle – from the design offices and to the final assembly, and the production of all the necessary components is available on the territory of the country», recalls Roman Marchenko, aviation expert, senior partner of Ilyashev &Partners Law Firm. Vitaliy Nemilostivyi, people’s deputy, member of the Parliamentary Committee of industrial and investment policies and former Deputy Minister of Industrial Policy, names Ukraine among the leaders in military transport vehicles production, where even competitors from Europe and Russia have weaker positions.

Corporatization and attraction of private capital into the sector is the only way to restore the aviation industry, says Oleksandr Kiva, Deputy General Designer of SE «Antonov».

Experts believe that two major problems prevent effective work in the field: lack of state funds to launch a large-scale mass production and small domestic market, which could generate effective demand. «Unfortunately, our technical devices are not in demand in Europe or the USA, thus, our main markets are located to the east of Ukraine. It will be easier to get Russia or China interested in the purchase of our aircraft if they become co-owners of our factories», says Marchenko.

Russian demarche gathers pace Perhaps, there are fewer other opportunities to attract Russia’s interest, which is potentially a major market outlet for Ukrainian aircraft.

In spite of great difficulties and evident backlog of its design school (particularly in civil and military transport aircraft), the Russian Federation stubbornly turns away from the Ukrainian aviation industry. Recent events prove almost all joint aircraft projects between Russia and Ukraine to be at stake. If in April 2011 the Ministry of Defense of the Russian Federation confirmed plans to purchase 60 aircraft An-70, already at the beginning of this year, it was found that the delivery of 17 units was approved, with a grace period of 2 years (not from 2014, but from 2016).

Valentin Badrak, Director of the Research Center for Army, Conversion and Disarmament, reports general waiver of procurement, as Russia decided to replace An-70 by own Il-476 in the weapons program. This aircraft is also currently undergoing flight tests, but the expert says that it is greatly not up to An-70 in specifications, capacity, fuel efficiency and other essential parameters.

The situation is going from bad to worse also with the aircraft An-124 «Ruslan», which advanced model production the Ministry of Defense of the Russian Federation has ordered from Ulyanovsk «Aviastar-SP». It was meant to be the second birth of the liner after its production ceased in 2004. Sure, the Ukrainian aviation industry as a partner in the project lays great hopes on the plans. However, Valentin Badrak reported that recently documents have been signed in Russia, which means launching modernization of «Ruslan» at the Russian Ilyushin Design Bureau – to An-124-100M model (bypassing the developer SE «Antonov»).
Another aircraft being potentially interesting to the Russian defense department is An-140 light transport military plane. Previously, the Ministry of Defense of the Russian Federation ordered 10 liners, though unofficially they negotiated delivery up to 62 units. However, Russia decided to resume work on the project IL-112 after three years break, though this year marks 20 years since launching aircraft development. Unlike An-140, which has been successfully put in operation, Il-112 has still not even reached the stage of the flight model. Russia has not refused An-140 completely, but most likely only one option will be chosen subsequently of the two projects in the same class.

Everyone gets a piece of the pie «Meanwhile the State occupies the position of a watchdog in respect of the aviation industry. We cannot produce ourselves, but do not want to share with others», says Roman Marchenko, who believes that all Russian demarches are directly connected with the reluctance of the Ukrainian party to provide corporate right to partners in joint projects. Vitalii Nemilostyvyi, who as deputy minister of industrial policy was in charge of aircraft industry development program until 2020, also agrees that privatization of the industry enterprises will allow resolving its two main problems – lack of funding and sales markets. «When we were working on the aviation industry development program in 2008, it provided for corporatization and privatization even at that time. Then some countries – India, Russia, Libya, China, Brazil, Canada and others showed interest in the acquisition of a stake in the future of JSC. I am sure this interest to be confirmed even now if we raise again the question of sale», says Nemilostyvyi. Then only a concept of the program was adopted, and its hanging up, according to the deputy, was also due to failure to approve the law on peculiarities of privatization of the aviation industry.

«Firstly, it is necessary, to clarify the bankruptcy procedure and avoid the situation when the global aviation industry giants would be able to buy our plants and design bureaus for the sole purpose of destroying competitors, and secondly – to keep balance of private and public interests», explains Nemilostyvyi. He states that they considered selling small stakes to different investors: 20-25% could get the Russian UAC, the European consortium EADS and the Chinese-Indian consortium each.

«It is not a solution to sell everything to Russia. Then we will not be able to eliminate the gap in avionics technologies, which we already have», clarifies the expert. By selling small stakes to different investors it would be possible to kill several birds with one stone – get sales market in Russia and access to new technologies thanks to the Europeans, as well as cash infusion, believes the expert. «Should a golden share be left for the state remains a question», he says.

Meanwhile experts find it difficult to forecast evaluation of the enterprises. «It is not essential, the main thing for the industry is to receive investments to start mass production, and it takes more than one billion», says Roman Marchenko. «It is quite simple to evaluate production facilities – the assessment methodologies have already been developed. As for the design office, it will be necessary to assess the intellectual property, and it’s not 1 billion US dollars», believes Nemilostyvyi.

It is not yet known whether preparation of enterprises to corporatization is in progress now: the State Agency for Management of Corporate Rights and State Property (which is again converted in the Ministry of Industrial Policy) has not yet responded to the request of the Center of Transport Strategies. The relevant legislation has been prepared only partially: Kharkiv State Aircraft Manufacturing Enterprise is on the list of enterprises that cannot be privatized, and Antonov, which united serial plant «Aviant» and the Antonov Design Bureau, is on the list of enterprises, which are not subject to privatization, but may be corporatized.
Less confidence than faith The development program for 2013-2014, which refers to corporatization, does not inspire confidence, at least with regard to the aviation industry.

Corporatization is not the only step comprising measures to «ensure stable operation and development of the industry» (quoted from the document). It also mentions the system of preferential lending to both consumers and producers of domestic aircraft, formation of the state order and other methods of increasing mass production. The program also specifies the volumes: production of 144 aircraft An-148 and 72 An-158, of which about 30 can cover the needs of the domestic market, more than 180 – for export. The production volume is estimated at $ 4.5 billion in current prices, however, the document does not specify the time frame to reach the set targets. It seems that most of the measures are «for box-ticking». The above figures have no justification (recently Oleksand Kiva, Deputy General Designer of SE «Antonov», considered the possibility to reach an annual rate of 24 An-148 aircraft within three years). Some important steps, which the aviation industry really expected, e.g. restrictions on the import of used aircraft or specific information on the leasing scheme, were not included in the document. Funding also raises concerns.

In total, it is expected to spend UAH 10.844 billion (UAH 10.421 billion in 2013 and UAH 423 million in 2014) for implementation of the program. However, not a penny of the money will be allocated from the state budget, or from the MFI loans. There must be «other sources, including funds raised under the state guarantees». The Budget Law for 2013 does not envisage any costs for the aviation industry (except for An-70, which is in the line «development of weapons» under the quota of the Ministry of Defense). However, targeted budget funding for the aircraft programs was actually cut down back in 2010, when the government finally gave up subsidizing purchases of aircraft through a leasing scheme involving SE «Leasingtechtrans» (according to the Accounts Chamber, in 2007-2009 nearly half a billion hryvnias had been spent inefficiently). Since then the state practiced funding aircraft production by replenishing the statutory funds of enterprises. The experts say that it is correct from the viewpoint of the future corporatization, because in this way the corporate rights of the State increase for the amount of investments that will subsequently allow selling these rights more expensively. In late 2011, the authorized capital of Kharkiv State Aircraft Manufacturing Enterprise was UAH 825,154 million, Antonov – UAH 1,996 billion (in total over 500 million hryvnias were invested in the authorized funds in 2010-2011).

 
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