Financing for Pulkovo's new terminal still requires to cross a number of hurdles

Published: 1/7/2000

For those travelling through Pulkovo"s second terminal during the summer, the need for a new international terminal is self-evident. Baggage handling delays can often mean that passengers have to wait for up to two hours for their bags in a terminal that is outstripping its relatively low capacity. Efforts to build a new terminal began as early as 1995, when the mayor of St Petersburg signed an agreement to create a joint stock company, called International Airport Terminal Pulkovo, with the intention of building a new international terminal, Pulkovo-3 for completion by 2000. The ownership of the company currently rests with the State Property Committee (KUGI) with 30.3%, the state owned Pulkovo Aviation Enterprise with 33.4% and three foreign investors, including US concern, Strategic Partners. Boris Demchenko, General Director of Pulkovo, is Chairman of the company and the Vice-Chairman is Carl Sax of Strategic Partners. The project had a financing structure that was pulled together 1997, involving a number of parties, including the EBRD and Deutsche Morgan Grenfell. According to Strategic Partners, the project was postponed at the time of the August 1998 financial crisis, due to falls in volumes at the airport, although the 5% fall in passenger traffic in the second half of 1998 was modest by comparison with some other major airports during the period. According to the airport, 1999 has been easier, with volume up 2% in the first quarter. For its sister airline, however, passenger traffic for the year fell by 18% and cargo traffic plunged by 60%, as the lucrative shuttle trade ceased due to the crisis and changes in customs regulations. The initial funding, reported in February 1997, was for $140m, with the EBRD supplying $78m, Deutsche Bank $38m, and the balance being raised from a number of sources, including Skanska, initially mentioned as contractor for the project. By August 1997 Pulkovo plans had grown significantly, with Boris Demchenko announcing a $280m project for the improvement of much of the airport"s infrastructure, including $140m on the new international terminal. For the latter, imminent funding was expected from the EBRD, in addition to funds from a western partner, rumoured to be Lufthansa, for a new $100m cargo terminal, capable of handling 120,000 tonnes a year, with a start date in autumn 1997. In June 1999, the project was reported to be starting by the year-end. Recent reports in the St Petersburg press have suggested that the project has collapsed due to lack of interest on the part of the foreign investors and the airport"s management. This view is denied by Carl Sax of Strategic Partners, who says that the project has only been delayed because of the problems caused by the financial crisis at the end of 1998. He added that he hoped that the financing would be back in place, possibly as early as March 2000, after the Presidential election. Sax was also confident that those involved in the financing before the project went on ice would return. He was unable to confirm what the commitment might entail, given the new circumstances, but advised that previous commitments had been $100m funding by the EBRD, with Deutsche Bank providing $47m of senior subordinated debt and Strategic Partners contributing $17.5m of subordinated debt. Sax also refuted suggestions that the airport may have lost interest in the project. Pulkovo"s lack of interest in the project, despite no direct capital involvement, was attributed by local press reports as due to the participation of Aeroport de Paris in the construction and operation of the new terminal. The reports cited the potential for monitoring the operations of Pulkovo and suggested that this could cause some of its operations to be reviewed, including a joint venture with Irish company, Rianta, for 2000 square metres of duty free sales in Pulkovo-2, which is reputed to have a very low lease level. According to Nezavismaya Gazeta, on 17th December 1999, this arrangement and others have been undertaken with little consultation with its owners, KUGI. According to the EBRD, the reasons for its delay in providing funding is not related to the fall in the airport"s volumes, but to the failure of the government to address the airport"s privatization and the splitting of the entity into three separate operating companies: airline, airport and services company. The FSVT"s predecessor, the FAS, proposed that this split should occur as early as 1997, but it is understood that Demchenko opposed such a move, as the split would result in the airline having a commercial relationship with the airport which, in the views of some analysts, could be disastrous for the airline, which is not regarded as the best run of Russia"s major operators. The EBRD also added that although a meeting has occurred in the last two months with the venture"s sponsors regarding the restructuring of the deal, they remain a long way from making a commitment and many of their concerns remain to be addressed with regard to privatization. Deutsche confirm that they continue to be interested in the project, but are waiting for ‘approvals" to be given and will not move ahead until those are achieved. All this makes it clear that the timescale for building of the new terminal is by no means set and a number of hurdles will need to be crossed before the project moves ahead with foreign investors at least. Demchenko was, however, quoted in June 1999 as saying he believed he could get Russian financing for the project, although he did not reveal the names of those investors and has since failed to make his proposed start time of late 1999. Associated articles: www.concise.org 28th February 1997, 25th August 1997, 12th February 1999, 26th April 1999,10th June 1999

Article ID: 1295