By Hamlet Avetisyan 

Since January 8, 2002, when the Government of the Republic of Armenia approved the concession agreement (hereinafter: the Agreement) signed between the Government of the Republic of Armenia and "Corporación América S.A." (hereinafter: the Concessionaire), discussions, in professional circles, about the efficiency of the deal and its consequences on the development of civil aviation do not stop. The discussions refer to the fact that since independence, in addition to flawed state policies, a number of regulations in the Agreement have also played a major role in the decline of civil aviation.

In this article, we will analyze the Agreement, referring to the issues raised by the professional community over the years of independence, comparing them with the approaches of the International Civil Aviation Organization (hereinafter: ICAO) and the wording of the Agreement.

Existing problems

For years, the following issues have mainly been discussed in professional circles:

1. "High service prices" of Zvartnots airport.
2. Provisions in the agreement that hinder the development of civil aviation.
3. Problems related to the operation of the old airport building.

"High service prices" of Zvartnots airport

We will begin our analysis with the discussion of the issue of service prices, because this is the top topic in the media and in professional discussions. The importance of the mentioned problem is due to the fact that high service prices affect the cost of the air ticket, which naturally leads to a decrease in the competitiveness of the airport and to a decrease in the development opportunities of civil aviation. The latter is due to the fact that high service prices are especially problematic for local airlines, because they pay more to the airport because they have to spend more time at the airport, as a result, the air ticket they sell has a higher price than that of foreign airlines.

First of all, we consider it necessary to clarify the terminology. In the documents published by ICAO, the term "Charges" is used hence we will use the said term instead of "service prices".

Our analysis of airport charges will be based on ICAO document 9082, "ICAO's Policies on Charges for Airports and Air Navigation Services" (2012, 9th edition), which summarizes international approaches to types of charges, approaches to their collection and other issues related to the topic.

The other basic document of our study will be the Agreement, which also contains regulations on charges.

However, before proceeding to the study of the mentioned documents, it is necessary to find out whether there are grounds to believe that the charges set by the "Zvartnots" Airport Concessionaire are high.

The most comprehensive study available at the moment was published by the United States Agency for International Development in 2012. The study was titled "Competitiveness of the Air Transport Sector in Armenia"[1]. The study compares "Zvartnots" and 18 airports operating in 15 countries of the world. It was noted that there is no transparent and effective mechanism for the economic regulation of the services provided by the airport. Such mechanism is important because according to the authors of the report aeronautical charges (landing, aircraft parking, telescopic bridge[2], passenger accommodation charges) are supposed to be regulated by the Agreement and it has been noted that the lack of a clear approach to the adjustment of charges creates uncertainty for airlines and consumers[3] At the same time, experts noted that the cost of the services provided by the airport is significantly higher than that of other airports presented in the survey and emphasized the necessity of their reduction.

Regarding the problem pointed out in the research, it should be noted that clause 12.1 of the 12th chapter ("Financial Matters") defines that it is the authority of the Concessionaire to determine the changes of Airport charges, noting that the Government has the right to object to such suggestion. Simultaneously, the clause states that "All fees, non-aeronautical fees and rents shall be determined at the sole discretion of the manager". In fact, there is a contradiction in this part because on the one hand it is stated that Airport charges are set by agreeing with the Government and on the other hand it is said that the determination of all charges is the exclusive competence of the manager. At the same time, it is necessary to add that if the government does not object to it in any way within 15 days after receiving the notification regarding the change of fees, then the changes are considered accepted. In the situation at hand, the government is assigned the role of a passive observer, not only because of the wording of the Agreement, but also because the RA Government has not established a professional body that would monitor the Concessionaire's activities and would advise the Government on the validity of tariff changes.

Taking into account the above, we can state that the Agreement largely lacks a tariff adjustment mechanism/approach, because such an approach/mechanism should contain information on tariff calculation and the variables underlying that calculation. This is confirmed in particular by point 3.8.1 of ICAO document 9980 "Manual on Privatization in the Provision of Airports and Air Navigation Services" (2012, first edition), which contains existing international approaches to the supervision of private policy on aviation charges. Thus, in order to control charges in the United Kingdom, the Civil Aviation Authority uses the following formula[4]: Retail Price Index minus X, where X is the percentage set by the authority, which in turn is less than the annual inflation rate. The variable X is in turn defined for every five years. When defining the mentioned variable, among others, major investment projects are taken into account. The formula is also evaluated by the Economic Competition Protection Authority. Similar formulas are used in other countries, but may also take into account predictions of passenger flow changes (e.g. Austria, Portugal, etc., see section 3.8.2). In another group of countries, the rate of charges is fixed for a certain period of time. For example, in Argentina, that period is five years. Parallel to these, there is also the approach of Canada, where there is no tariff regulation mechanism. A feature is that in Canada, major airports and air navigation service providers are run by non-profit organizations, so there is no risk of abuse of a dominant position (see section 3.8.3). In the case of Canada, rates are negotiated between airports and airlines.

The study of international experience and its comparison with the text of the Agreement allow us to conclude that the regulations regarding charges in the Agreement are contrary to international practice and do not derive from the interests of the Republic of Armenia. There are also no data on the discussions between the Concessionaire and the airlines, which should naturally be transparent, covered and in the focus of the economic oversight mechanism, since one of the objectives of this oversight is the protection of passengers' interests (see document 9082, "Economic oversight" point 13) without which passengers' interests may be marginalized.

It is important to highlight that because of the privatization of the airport, the state is obliged to exercise economic control over it, a question arises as whether such a decision is reasonable. ICAO document 9562 is important in this regard (2020, 4th edition). According to point 2.16 of the document, in cases where a country with a limited aviation sector and small territory is at hand, where the management of the international airport is the main function of the civil aviation department, removing the airport from the jurisdiction of the authorized body may cause additional costs. First of all, this refers to the administrative and organizational costs that arise as a result of adding a new "element" for the purpose of airport management. In order to simplify ICAO's position, let's say that since the Republic of Armenia is a small country that does not have a complex airport network (it does not have many airports), then it may not be reasonable for RA to involve the private sector in the management of the airport/s.

The mentioned issue becomes more crucial if we take into account point 2 of chapter 2 of document 9082 which refers to charge pricing. The first sub-clause provides that revenues from non-aeronautical sources[5] may be used to keep aeronautical services charges within reasonable limits through offsetting.

These circumstances force to raise once again the question of the advisability of private participation in the management of the airport. In particular, it is obvious that one of the key goals of any private entity is the increase of revenues, while in the specific case of RA, the stated goal may come into conflict with the purpose of aviation development in RA, one of the tools of which will be to keep the charges for airport services low at the expense of non-aviation revenues of the airport.

It should also be noted that the discussions regarding the high charges applied at the airport continue to this day. In particular, according to the Government's claims, one of the reasons[6] for the failure of the Armenian-Arab "Fly-Arna" airline was the price policy of the Concessionaire. Therefore, we can claim that the mentioned problem remains relevant.

Provisions of the Agreement hindering the development of Civil Aviation

Another issue circulating among the professional community is the so-called "250 km" rule. This concept is detailed in Chapter 8 "Government Rights and Responsibilities", clause 7: "If the Government decides to transfer to the private sector an existing airport or the construction, maintenance, improvement, expansion, management, operation of any other local and/or international airport to be constructed, then the Manager shall have the right of preference to perform the said works, however, only under the conditions set by the Government of the Republic of Armenia, and the said right must be exercised by a third party within thirty (30) days after the announcement of any tender or bid. The Manager's right of preference will include the right to enter into a relevant contract, provided that the Manager offers terms that are materially equivalent to those offered by the best bidders. If the RA Government directly or through a contract with third parties. (a) builds an international airport other than the Airport in the territory of the Republic of Armenia or turns any of the existing airports into an international airport, or (b) builds a local airport within a radius of two hundred and fifty (250) kilometers from the Airport, then from the moment the said construction begins until the end of one year following the end, the Manager has the right to terminate this Agreement in accordance with clause 18.7 and receive appropriate compensation from the Government of the Republic of Armenia."

The parties acknowledge that Gyumri airport serves flights to CIS countries. Gyumri airport cannot serve international flights except flights to CIS countries."

The study of this point shows that according to the Agreement signed by the RA government, the development of civil aviation is largely limited by a foreign private organization, at the same time it can be argued that in some respects a monopolist has been formed in the field of airport services, and it is not a natural, but artificially created monopoly.

In other words, if the RA government wants to restart or create a new airport, the Concessionaire will have the right of preference to perform these works, if it offers materially equivalent conditions compared to the best bids. In connection with the above, the following question arises: why should any business entity participate in the tender for the re-operation or creation of any airport in the territory of the Republic of Armenia, if by virtue of the mentioned point the implementation of the project will most likely be handed over to the Concessionaire. In the light of the above, we can argue that the clause in question restricts effective competition in the field of airport services. In this case, the competition is limited, first of all, because RA will actually have great difficulty (if able at all) develop local capabilities in the field of airport services, in other words, this may hinder the development of Armenian companies specialized in this field and able to compete in the future in providing airport services in third countries and thereby to expand the exportable sector of the RA economy, which in turn would create an increase in well-being, due to the fact that such activity implies, first of all, an increase in jobs, in tax revenues etc.

On the other hand, as a result of handing over complete economic sectors to the private entities, the profits generated in that sector are not invested in the RA territory and therefore do not increase the national GDP.

Problems related to the operation of the old airport building

Issues related to the operation of the old airport terminal were also discussed many times.

It is appropriate to start the discussion of the mentioned issue with the relevant clause of the Agreement.

In particular, clause 2.1 of Chapter 2 ("General Information") of the Agreement states that, among other goals, the RA government has decided to modernize the physical infrastructure of the airport, for which purpose it was decided to conclude the Agreement. If we consider the current situation in the light of today's realities, the question inevitably arises whether the construction of a new terminal corresponds to the goal of upgrading the physical infrastructure of the airport mentioned in clause 2.1. The mentioned question arises because at the time of signing the Agreement, the old terminal of the airport, the "round building", which was put into operation in 1980, already existed. In particular, it is not clear why it was decided to build a new terminal when the old one was already there. The mentioned question is especially important in the sense that according to the available public data, the operation of the old terminal could be more appropriate than the construction of a new building. The main source of data on the mentioned issue is the autobiography of the former head of the RA Civil Aviation Department, Dmitry Adbashyan: "My Aviation[7]". Book's "On Zvartnots in 2013" contains details about the old airport building which allow us to make some judgments about the problem. Thus, Adbashyan notes in his memoirs that although the terminal was originally designed to serve domestic flights of the USSR (it lacked border and customs control points, transit halls for passengers without visas, long-term rest areas, duty-free shopping areas, etc.), the design and architectural works were carried out taking into account the possibility of adapting it for international flights through further modernization. The modernization program of the airport was called "Saturn" and cost approximately 60 million dollars.

However, the mentioned plan was not implemented, it was decided to build a completely new terminal, which, however, is inferior to the old terminal in terms of its engineering solutions, because it cannot receive large-sized aircraft, while the old terminal can receive aircraft of any size (for example, A-380).

Taking into account the above circumstances, it can be argued that at least it should be studies whether the Concessionaire has fulfilled its contractual obligations in a proper manner. In particular, according to Adbashyan's memoirs, the implementation of the "Saturn" project would cost approximately 60 million dollars, while the construction of the new terminal cost 160 million.

As an alternative to the use of the airport's assets, it is possible to follow the option proposed by Adbashyan, that is, the old terminal building can be used to serve transit passengers. etc. In this regard, it is also important to add that in the 1990s, the mentioned project was also of interest to foreign partners, particularly such companies like "Aeroflot" and "KLM." and the Japanese partners offered a loan for the financing of the given project with a repayment period of 25 years with an interest rate of 1 percent.

Solutions

Taking into account the above analysis, we can offer the following possible solutions:

1. Establish a mechanism of economic oversight of the Concessionaire's operation. The purpose of the economic control mechanism will be monitoring the Concessionaire's financial operation. The purpose of the oversight, among others, will be to monitor revenues from aviation and non-aviation sources and reduce the amount of aviation charges
2. Conduct negotiations between the Concessionaire and the Government, the purpose of which will be to discuss the format of the use of the old airport building
3. Renegotiation of the agreement, the purpose of which will be to repeal the "250 km" rule discussed in the article.

[1] https://pdf.usaid.gov/pdf_docs/pnady700.pdf

[2] Used to transport passengers directly from the airport to the plane.

[3] The analysis mentions: operators and users.

[4] Retail Price Index (RPI) minus X

[5] These include the commercial activities carried out on the airport territory - areas that are leased to various businessmen, car parking lots and any other activities that are not related to the servicing of air transportation.

[6] https://hetq.am/hy/article/167428

[7] https://nahichevan.ru/wp-content/uploads/2021/11/moja-aviacija.pdf

(Hamlet Avetisyan is a lawyer based in Yerevan)