The government is returning to the idea of corporatization of enterprises in the aircraft manufacturing industry. This follows from the program for development of the economy in the period of 2013-2014, which the Cabinet of Ministers approved in late February. According to the program, a state holding company called Antonov is to be established in 2013. Its authorized capital will be created by transferring 100% of the shares in the 410 Civil Aviation Plant, the Antonov state enterprise, and the Kharkiv State Aircraft Manufacturing Company to it after their corporatization. This will facilitate improvement of its financial health and allow creation of conditions for stepping up the production of the AN family of aircraft, according to the explanatory part of the document. This is not the first time such a move has been spoken about: the idea has not only been floating in the air for five years, but it has also been reflected in certain government programs. Privatization was also considered as the next step. Experts believe that realization of the idea has thus far been prevented by red tape, the constant change of power in the country, and other political but not economic reasons. Interest in the Ukrainian aircraft manufacturing industry from many of the leading aviation countries in the world remains despite the fact that independent aircraft manufacturing has practically stopped completely.
Hopes remain alive The Antonov state enterprise’s Deputy Chief Designer Oleksandr Kiva believes that corporatization and attraction of private capital into the industry are the only way to revive the aircraft manufacturing industry.
"Today, all the enterprises in the industry are having to operate under conditions of very tough competition in world markets. Our existence in the form of a state enterprise significantly limits our ability to attract investment capital, but this does not remove the responsibility for results. There are already no successful public companies in the aircraft manufacturing industry in any country,” Kiva said.
From his point of view, the decision on privatization of enterprises in the industry is long overdue, but its implementation has thus far been hampered by the lack of a coherent management system in the government.
"I think that implementation of such plans is becoming more realistic now that the parliament, the government, and the President are working in concert," he added.
Experts believe that Ukraine still has a high potential in the aircraft manufacturing industry.
"We have largely succeeded in preserving the full aircraft manufacturing cycle - starting with design offices and ending with the final assembly of equipment, together with production of all the necessary components on the territory of the country,” said Roman Marchenko, an expert on aviation and a senior partner with the Ilyashev & Partners law firm.
Parliamentary Deputy Vitalii Nemylostyvyi, who is a member of the Parliamentary Committee on Industrial and Investment Policies and a former deputy minister of industrial policy, said that Ukraine is a leader in the military transport equipment niche, where even competitors from Europe and Russia look weaker.
Corporatization and attraction of private capital into the industry is the only way to revive the aircraft manufacturing industry, said the Antonov state enterprise’s Deputy General Designer Oleksandr Kiva.
According to experts, two main problems prevent this sector from firing on all cylinders: the government’s lack of funds for launching large-scale mass production and the small volume of the domestic market, which could have generated effective demand.
"Unfortunately, our equipment is not in demand in Europe or the United States. Therefore, our main markets are to the east of Ukraine. It will be easier to interest Russia and China in purchasing our aircraft if they become co-owners of our factories," said Marchenko.
Russian maneuvers gaining momentum Arguably, fewer other opportunities to attract the interest of Russia, which is potentially a major market for Ukrainian aircraft, remain.
Despite great difficulties and the fact that its design school clearly lags behind (particularly in the areas of civil and military transport aircraft), Russia continues to stubbornly turn away from the Ukrainian aircraft manufacturing industry. Recent events show that practically all the joint projects between Russia and Ukraine in the aircraft manufacturing industry are under threat today. For example, the Russian Ministry of Defense confirmed plans to purchase 60 An-70 aircraft in April 2011, but delivery of only 17 had been agreed as of the beginning of this year and delivery of these 17 have even been delayed by two years (from 2016 instead of 2014).
According to the director of the Center for Army, Conversion, and Disarmament Studies, Valentin Badrak, cancelation of the procurement is now being considered because Russia has decided to replace the An-70 aircraft with its own Il-476 aircraft in its arms program. The Il-476 aircraft is currently undergoing flight tests, but, according to Badrak, it is significantly inferior to the An-70 in terms of technical specifications, load-carrying capacity, fuel efficiency, and other essential parameters.
The dark clouds over the AN-124 Ruslan aircraft are also becoming thicker because the Russian Defense Ministry has already ordered production of its upgraded version from the Ulyanovsk-based Aviastar-SP. This was supposed to be the second birth of the airliner after its production ceased in 2004. Of course, the Ukrainian aircraft manufacturing industry placed high hopes on these plans as a partner in the project. However, according to Badrak, the Russians recently signed documents that launched the process of upgrading the Ruslan aircraft to the An-124-100M version at Russia’s Ilyushin aircraft manufacturing complex (bypassing Antonov, which is the developer).
Another aircraft that is potentially of interest to the Russian defense ministry is the military version of the An-140 light transport airplane. Previously, the Russian Defense Ministry ordered 10 of these aircraft, although unofficially there were talks that up to 62 were needed. However, Russia has decided to resume the program for creation of its own IL-112 aircraft after a three-year break, although, in fact, this year marks 20 years since the start of work on the airplane. Unlike the An-140, which is being operated successfully, the IL-112 has not even reached the stage of creation of a flight model. Russia has not completely given up on the An-140, but it will most likely select only one of the two projects of the same class subsequently.
Something for everyone "For now, the government has taken a dog-in-the-manger position with respect to the aircraft manufacturing industry. We cannot produce it ourselves, but we do not want to share it with others," said Roman Marchenko, who believes that all the Russian maneuvers are directly connected to Ukraine’s lack of desire to grant its partners corporate rights to joint projects.
Vitalii Nemylostyvyi, who was in charge of the preparation of the program for development of the aircraft manufacturing industry until the year 2020 when he was a deputy minister of industrial policy, also agrees that privatization of the industry’s enterprises will facilitate solution of its two main problems – the lack of funding and the lack of markets.
"When we were drafting the program for development of the aircraft manufacturing industry in 2008, the program made provisions for corporatization and privatization of the industry even at that time. At that moment, interest in acquisition of stakes in the future joint-stock companies were confirmed by a number of countries - India, Russia, Libya, China, Brazil, Canada, and others. I am sure that that this interest will be confirmed again if the issue of sale is raised now," said Nemylostyvyi.
Only the concept for the program was adopted at that time and, according to the parliamentary deputy, the program was frozen because, among other things, a law on the particulars of privatization of enterprises in the aircraft manufacturing industry was not adopted.
"This is necessary, firstly, in order to clarify bankruptcy procedures and avoid a situation in which the giants of the global aircraft manufacturing industry could buy our factories and design bureaus just for the purpose of destroying competition and, secondly, in order to preserve the balance of the interests of private and government entities," Nemylostyvyi explained.
According to him, the option of selling small stakes to various investors was considered: 20-25% each to the Russian OAK, Europe’s EADS concern, a Sino-Indian consortium.
"Selling everything to Russia alone is not the way out because we will not be able to close the gap that presently exists in avionics technology in this way,” said the expert.
According to him, sale of small stakes to different investors would have enabled Ukraine to kill several birds with one stone – secure a ready market in Russia, gain access to new technologies thanks to the Europeans, and secure a cash infusion.
"The only debate left was whether the government should retain a golden stake or not,” he said.
For now, experts find it difficult to predict how the enterprises can be valued. "That is not essential. The main thing is for the industry to secure investments for launching mass production, and this requires more than one billion," said Roman Marchenko.
"It is quite simple to value mass-production plants because the valuation methodology has already been developed. As for a design office, it is necessary in this case to determine the value of intellectual property, and this is not USD 1 billion," said Nemylostyvyi.
It is unclear whether enterprises are already being prepared for corporatization: the State Agency for Managing Corporate Rights and State Property (which is again being transformed into the Ministry of Industrial Policy) has not yet responded to the request from CTS. The legislative framework for this has been prepared only partially: the Kharkiv State Aircraft Manufacturing Company is on the list of enterprises that are not subject to privatization while the Antonov state enterprise, which unites the Aviant aircraft plant and the Antonov aircraft manufacturing complex, is on the list of those that are not subject to privatization but may be corporatized.
Less confidence than faith The development program for the period of 2013-2014 that provides for corporatization does not inspire confidence, at least on the part of the aircraft manufacturing industry.
Corporatization is not the only step that is stipulated in it as a measure to "ensure stable operation and development of the industry" (a quote from the document). It also mentions a system for preferential lending to both consumers and producers of domestic aircraft, placement of state orders for aircraft, and other methods for increasing mass production. Volumes are also specified in the document: production of 144 An-148 airplanes and 72 AN-158 airplanes, out of which about 30 can be used to meet demand on the domestic market and more than 180 exported. The volume of production is estimated at USD 4.5 billion in current prices, although the document does not specify the period in which these targets are expected to be met. It seems that most of the measures were spelled out "just to tick the box." These figures are not backed up by anything (recently, Antonov’s Deputy General Designer Oleksandr Kiva talked about the possibility of reaching an annual rate of 24 An-148 aircraft within three years). A number of important steps that the aircraft manufacturing industry really expected - for example, restrictions on import of used aircraft or details of the leasing mechanism - were not included in the document. The financing aspect is also of concern.
UAH 10.844 billion (UAH 10.421 billion in 2013 and UAH 423 million in 2014) is expected to be spent on all the measures stipulated in the program. However, not a single kopeck of this money will come from the state budget or loans from international financial organizations. The money must come from "other sources, including funds raised under state guarantee." The Law on the State Budget for 2013 does not provide for any expenditures on the aircraft manufacturing industry (apart from the An-70 airplane, which is included in the budget’s section on "development of arm" as part of the Defense Ministry’s quota). Admittedly, the cutting of targeted budget funding for programs in the aircraft manufacturing industry actually began in 2010, when the government finally stopped subsidizing aircraft purchases through a leasing scheme involving the state-owned Lizingtekhtrans company (according to the Accounting Chamber, nearly UAH 0.5 billion was spent inefficiently under this scheme in 2007-2009). Since then, the government has introduced the practice of financing aircraft manufacturing by boosting the authorized capital of enterprises. From the point of view of the future corporatization, experts believe that this is right because the corporate rights of the state increases by the amount of investments made, which will subsequently allow these rights to be sold at higher prices. At the end of 2011, the authorized capital the Kharkiv State Aircraft Manufacturing Company was UAH 825.154 million while the authorized capital of Antonov was UAH 1.996 billion (over UAH 500 million was used to boost their authorized capital in 2010-2011).
