Economic Policy Review ISSN 1313 - 0544

Landing on Cracked Track

Author: Svetla Kostadinova / 26.01.2007
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State policy on development and management of infrastructure lets us think that either it does not want to “give up” control due to various reasons (lost of influence and the need to reduce considerable part of administration, etc.) or it does not realize the benefits of transferring infrastructure to the private sector. The last is well known by the Ministry of Regional Works and Development since it has variety of information on its website about international experience and the positive impact of private management of airports. All examples are about big airports that have been privatized and the outcome benefits are improved infrastructure, rising of passengers' numbers and their satisfaction.

Airports and Privatization

State failure in airport privatization in Bulgaria is happening because:

1) Privatization procedure is highly obstructed (i.e. Varna and Bourgas airports case) that leads to postponing, problems and vitiation of the privatization process in the country. Most of the investors that dare to participate and make long term plans are not sure about the outcome.

2) The state protects ‘national interest' and sometimes abuses the term ‘national security'. The law on privatization and post privatization control contains a special list of enterprises with more than 50% of state shares, privatization of which should be done after approval of the Parliament on suggestion of Council of ministers. This list has been corrected several times and neither its initial version nor its amendments have been grounded. No one really knows how the state would react if a serious potential investor is interested in one of the listed state companies and wants fast and clear privatization procedure. For information we would say that there are 114 state companies in the list and we assume that all enterprises would need privatization strategy that can be either burdened or meaningless or its creation would last for years.

The list includes big state companies such as airports, harbors, post service, railways, etc. Every attempt so far to privatize some of them has been accompanied by scandals, languishing of investors' interest, enormous budget subsides, delay of development of attached branches, etc. In recent years state airports were among the few state companies that realized profit and this is the best moment to sell them fast by realizing big fiscal effects for the state.

Sofia Airport – This Month Example

The problems with the collapse of part of the newly built roof and cracked landing–strip of Sofia airport lead us to the following conclusions.

First, the state as investor is a lost cause. In almost all cases when taxpayers' money are spent in the form of subsidies and state-guaranteed loans, the responsibility is common; the interest is not protected as a private investor would do; the control is inefficient and as a result there are grounds for corruption and failure of the project. But most importantly – the responsibility is born by the state which means by all of us.

How much does Sofia airport cost up to now?

Stages of Reconstruction, Development and Enlargement of Sofia Airport Project

Period

Financing (Euro Mln.)

Financing organization

Major contractor

Financial Agreement between EIB and Bulgaria for new passenger terminal

September 1997

60

European Investment Bank

 

Construction of new land-trip system

June

1998

41.5

Kuwait Fund for Arab Economic Development

Consortium Mohamed Al-Karafi and Sons – Admak General Contacting Company

Financing of consultancy company for the project 

April

1998

7.6

PHARE

 

Financing of construction of new passenger terminal

August

2000

50

ISPA

Strabag International

Bulgarian co-financing for new passenger terminal by state budget

December

2000

Not available

State budget

 

Total

159.1

 

We have not included state administration expenditures or lost benefits from prolonging the project for more than 9 years.

Maybe again to protect the national interest signed contracts with the supervisory company and the contractor are not publicly available. Several newspapers released information about the lack of a clause for “guarantee for good execution” by the supervisor, nor do we know whether in the contract for the new terminal there is possibility for renegotiating prices in case of “rising the price of petrol or steel”.  Every time when there is a lack of transparency and publicity of contracts between state and other companies we can expect delays, renegotiating and corruption. It is not clear what the ministry should do to accelerate completion of the project or how it can terminate the contract. The ministry claims that it will by all means avoid termination of the contract and file a court claim because this can prolong the project for years. How can we be sure however that after new conditions are agreed on there will be no other re-designing and spending of additional state funds?

Second, it should be clear that until the project is completed the state cannot give Sofia airport on concession if it has such intentions. The financing agreements do not allow for concession until these agreements are in force.

To summarize we can say that almost all decisions in relation to Sofia airport are unprofessional and highly politically influenced. Lack of political will for starting and completing, as faster as possible Sofia airport privatization is the main obstacle and cause for the troubles. It appears that the state “is not ready” to withdraw from its activities and to let private sector do what it best can do – invest, develop and maintain an airport that will provide all clients with good services at competitive prices.

 

What can be done?

·         Full inspection of all stages so far and what is left to be done;

·         Request of additional guarantees from the contractor and supervisor of the project for completion until September 2006;

·         Receiving of contract forfeit for delays;

·         If an agreement is not reached an action against the contractor should be taken – file a lawsuit and after that

·         Renegotiating financial agreements with European Commission and EIB that would allow for

·         Concession of Sofia airport where the concessionary pays the unused financing so far and the money already spent by current contractor are reimbursed after finishing the court trial;

·     Immediate concession of all airports using transparent auction.