FILES MONTENEGRO AIRLINES: DOOMED FLIGHT (1)
Files of MONTENEGRO AIRLINES – DOOMED FLIGHT bring forth a series of accounts which testify how the state-owned company was systematically destroyed while being funded form the state budget in order to artificially maintain the monopoly in the “Montenegrin skies”. The files reveal how politicization of the administration, absence of individual responsibility and attitudes towards company’s resources turned Montenegro Airlines into an expensive toy on the verge of collapse. The sequel tomorrow will provide the responses concerning MA operations of the present and the former management.
Since the establishment of Montenegro Airlines (MA), the government of Montenegro has been allocating substantial funds for survival of the national airlines and invested through recapitalization and subsidies €58.5 million by the end of 2014. Moreover, the company lost at least €14.3 million due to reducing its share capital. This means that the state lost at least €73 million due to providing aid to the airline company for many years, what is more the company has been suffering operating losses.
This is confirmed by the analysis of the MANS Investigation Center and “Vijesti” based on the official business operation reports of the company, documents of the Central Registry of Business Entities and the data of the Ministry of Finance. Financial statements of MA for 2015 are not yet available, but the last year state budget envisaged granting an additional aid of €3.7 million to the national airline company.
The official documents have revealed that the government, as the company founder, continuously invested large funds to preserve the company’s liquidity, and one way of investing was increasing the capital stock, so by the end of 2014, the company was recapitalized at least six times totaling €47.3 million.
Based on the government’s decision on the initial capital and recapitalization in the period from 1994 to 1997, MA’s capital amounted €11.2 million. The 27-million recapitalization followed in 2002, three years later, the capital was increased by another €2.1 million, and in 2009 an additional €1.5 million was invested. Finally, in 2014, two more recapitalizations were arranged, one in the amount of €3.7 and the other €1.6 million.
Most of the government’s claims, which were converted into the founding capital increase, arouse from the short-term loans for the purchase of the airline company aircraft, their regular maintenance, repairs and insurance, the establishment of air transport and the introduction of new flights, but MA did not repay the loans in time.
Apart from the capital increase, the government granted subsidies to MA and allocated around €11.2 million from the budget by the end of 2014. The subsidies were primarily aimed at purchasing fuel, which was particularly conspicuous at the time when fuel prices on the market were hefty, and writing off the debts on the basis of taxes and other public revenues.
While it converted debts and granted subsidies, at the same time the state was losing due to the reduced the airline company’s share capital. The official data show that in 2009 the company’s capital dropped by €14.3 million, in order to cover its losses accrued over years.
Owing to this step, the company was almost “free” of losses, but nevertheless it continued with its bad business practices and by the end of 2014 it had an uncovered loss of €40.5 million (with the additional €9.5 million for the current year). The uncovered loss exceeded the share capital, which amounted to €31 million.
In economy terms, when uncovered losses of a company exceed its capital, it is a sign that the company’s survival is at stake, and adding the fact that at the end of 2014 the airline company had dues of nearly €38 million, then financial situation of Montenegro Airlines is clear – it has managed to survive over years mainly due to indirect and direct state aid.
Given that the government reached 99 percent of shares in MA due to the capital increase, the issue on its plans concerning the sustainability of the airlines, which was founded in 1994, and became operational a few years later, is brought up.
A range of local companies was among of MA founders, such as hotel groups Budvanska Rivijera and Ulcinjska Rivijera, as well as Duvanski kombinat, Radoje Dakic or Zetatrans. Apart from the majority owner, other shareholders did not show interest in investing in the sustainability of MA.
Illegal State Aid in 2011
In mid-2011, the government wrote off €3.2 million debt of MA, which at the time was the illegal state aid (which distorts or may distort free competition in the marketplace).
In March 2011, the State Aid Control Commission decided on the request of the Ministry of Transport. The Ministry requested from the Commission to determine whether issuing state guarantees for the airline company’s bank loan amounting to €9.6 million would represent the state aid.
The management of MA planned to take a loan from commercial banks with a two-year grace period and a six-year repayment period, whereby the amount of €4.6 million would be used for introducing new flights and increasing the number of existing ones, €4 million for the participation in the purchase of the fourth aircraft Embraer, and the remaining million would be used for the mandatory general inspections of Fokker aircrafts in the MA fleet, as well as for other maintenance.
Under the Law on State Aid Control “providing a state guarantee for beneficiary’s loan, who did not show in financial reports increase in loss, reduction of revenues, increase of inventory, reduction of cash inflow, increase in indebtedness and reduction of asset value, during the period of two years preceding the provision of the guarantee, provided that loan beneficiary may obtain a loan under market conditions on the financial market; state guarantee is provided for a defined amount of credit, for a defined period of time; amount of the guarantee does not cover more than 80% of the credit liability; guarantee is based on the market price” shall not be considered as state aid.
In March 2012, the State Aid Control Commission adopted a decision determining that providing state guarantee to MA for loans at commercial banks was not considered as state aid, but emphasized that such decision was adopted on the basis of the Ministry of Transport that the MA debt towards Agency for Flight Control of Serbia and Montenegro was being reduced and on the basis of the opinion of the independent audit which states that the debt reduction would modify financial statements for 2010.
The Air Traffic Services Agency provides air traffic control to airline companies for an adequate fee. In late 2010, MA debt stood at €6 million, and was estimated to reach the sum of 7€ million at the close of 2011. The government intended to reduce the debt by passing the Herceg-Novi based hotel “Park”, worth nearly €7 million, into the ownership of the Agency for Flight Control.
As early as in June 2011, the government wiped out the €3.2 million debt. This debt was negotiated through the Protocol between the government and MA, which was signed in July 2007. It was incurred between 2002 and 31 December 2006, by four loans approved by the government on the basis of specific deposits, as well as the company’s debt to the Pension and Disability Insurance Fund of Montenegro. Thus, the period was bridged, and it is officially stated that MA “was not the state aid beneficiary” in the period from 2002 to 2006.
However, in September 2011, after the State Aid Control Commission was informed about the government’s decision, it sent an official letter to the Ministry of Transport emphasizing that in case the MA debt to the Air Traffic Services Agency was not reduced, the state guarantee was to be considered as the state aid, whereas, in this case, the government’s writing off the debt was considered as the illegal operating aid, since the Commission had not been notified about it.
At the same time, the Commission requested from the Ministry of Transport to provide information on whether the debt of MA to the Air Traffic Services Agency was reduced, whether and to what extent was the government guarantee of €9.6 million used, as well as whether the government already wrote off the debt of € 3.2 million or it was underway.
In September, the Ministry of Transport submitted a response to the Commission in which it stated that “the process of debt reduction in progress, because of legal and technical reasons, the process could not be fully completed, but its implementation is in focus” and “it will be completed as soon as possible.”
The Ministry said that out of the planned €9.6 million, two million had already been used (on the basis of the commercial loan agreement signed with Hipotekarna banka), and that the government adopted conclusions that “the company was written off the debt of €3,233,336.54”.
The government share in Hotel “Park” is not compensated through offsetting the debt with the Air Traffic Services Agency, and although its value was estimated to be €7 million, it was recently sold to the company “Carine” owned by Cedomir Popovic for only €2.2 million.
Restructuring Plan worth 78 million, state’s stake 35.6 million
In June 2012, the State Aid Control Commission adopted a decision on granting aid to the airline company, based on the restructuring plan worth €78.1 million. Out of this sum, the state invested €35.6 million, whereas the company’s share was €42.6 million.
State aid encompasses a set of measures including conversion of debt to the Air Traffic Services Agency of €7.2 million, conversion of debt to Aerodromi Crne Gore of €5.9 million, writing off three-million debt of Aerodromi, and deferred payment of debt to the company of €700,000. It was envisaged to take over the repayment of a €13.3 million loan for one Embraer, and deferring paying taxes and benefits for the period of one year, in the amount of €320,000 per month.
Moreover, the state aid included the write-off of the debt of €3.2 million, which was considered by the State Aid Control Commission as the illegal aid in 2011, and the state guarantee of €9.6 million for MA’s loan with commercial banks.
The management structure, headed by Zoran Djurisic, was replaced with the management led by Daliborka Pejovic.
It is publicly known that measures concerning obligations towards the Air Traffic Services Agency and Aerodromi Crne Gore have not been implemented, and in case they are, the state would lose another €16 million. The data on the number of loans taken over by the state, for which it issued guarantees, are not publicly available.
The MA measures envisaged in the Restructuring Plan worth €42.6 million implied revenues from leasing two Fokker aircrafts for a two-year period, which would secure €12 million (€250,000 per month), after which the aircraft would be sold for the sum of €2 million. The remainder of €28.4 million would be provided through commercial bank loans. It is not clear if MA implemented these measures, and to which extent.
However, it is known that the company’ s Restructuring plan envisaged cutting salaries and number of employees in order to have 362 employees at the close of 2014. Yet, the official data show that at the end of the year MA had 62 workers more, i.e. 415 in total, out of which 353 was permanent staff and 62 temporary employees.
This text is created with the support of the European Union within the project “Zero Tolerance to Corruption”. Network for Affirmation of Non-Governmental Sector – MANS is solely responsible for the contents of this article, and the views taken herein shall not in any case be considered as those of the European Union.
Ines Mrdovic
Ivana Gudovic
