Study on State asset management in the EU

Pillar 4 (Case studies) – management in the Nordics: the case of Oyj

Contract: ECFIN/187/2016/740792

Written by KPMG and Bocconi University February 2018

EUROPEAN COMMISSION Directorate-General for Economic and Financial Affairs Directorate Fiscal policy and policy mix and Directorate Investment, growth and structural reforms

European Commission B-1049 Brussels

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Airports management in the Nordics: the case of Finavia Oyj

This note discusses the ownership and management model implemented for airports in in the last decades. In fact, Finland is particularly noteworthy for the manner in which these assets are managed: Finnish airports are currently managed by Finavia Oyj (Finavia), a public limited company which is fully owned by the central government in order to develop and efficiently manage infrastructures and air traffic in Finland. The case of Finavia is an example of management of airports by the central government by means of a specialised PSH created with a specific purpose (i.e. special assignment company).

1. INTRODUCTION

Finavia is a Public Sector Holding (PSH) created in 1991 by the Finnish central government, which fully owns it. It was established from the previously existing Finnish Civil Aviation Administration. Finavia currently manages 24 airports in Finland, among which the most important in terms of passengers and revenues are the airports of and Lapland. In addition, Finavia has also the responsibility to manage air traffic control and the related services (i.e. control of air traffic towers and centres, provision of aeronautical data, development and maintaince of the Finnish air navigation system).

Other public bodies involved in the management and control of the aviation sector in Finland for various purposes are:

 the Ministry of Transport and Communications (Liikenne- ja viestintäministeriö - LVM), which is responsible for the oversight of Finavia’s strategic and operational decisions1;  the Finnish Transport Safety Agency (Trafi)2, which is the organisation responsible for developing the safety of the transport system and is in charge of transport system regulatory duties;  the Finnish Civil Aviation Authority (Ilmailuhallinto)3, which was created in 2006 and currently has the responsibility to issue instructions and regulations on flight safety and security. It is an independent agency that operates under the control of the Ministry of Transport and Communications.

The case of Finavia has been chosen because the airport management model implemented by Finland is peculiar within the EU28 context; Finland is currently one of the six countries at European level which has a centralised model for the management of airports (in addition to Spain, Portugal, Estonia, Latvia and Lithuania), by means of Finavia.

In more details, in respect to other EU countries which manage airports through specific PSHs partly owned by private investors (i.e. Spain and Portugal with ANA Aeroportos de Portugal4 and Aeropuertos Españoles y Navegación Aérea - Aena S.A.5

1 On 1st April 2017, the ownership steering of Finavia was transferred from the Ministry of Transport and Communication to the Ownership Steering Department of the Prime Minister’s Office, which became responsabile for the preparation and practical implementation of the state ownership policy and steering of PSHs. For more information please see: http://vnk.fi/en/government-ownership-steering [Accessed 15th February]. 2 For more details on Trafi please see: https://www.trafi.fi/en/aviation [Accessed 15th February 2018]. 3 For more informations, please see: https://www.lentoturvallisuushallinto.fi/about_caa_finland/# [Accessed 15th February 2018]. 4 For more information please see: https://www.ana.pt/en/corporate/home [Accessed 15th February 2018]. 3

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respectively), Finland has chosen to do so through a PSH fully owned by the central government.

2. CONTEXT

Since aviation is a sector which is “international by nature”, Finnish aviation regulation is subject to common rules and agreements among countries in order to ensure safety and efficiency of the sector. For this reason, aviation-related organisations cooperate at international level to produce commonly recognised aviation standards. The organisation that in Finland has this responsibility is the Trafi, and one of its main partners is the International Civil Aviation Organisation (ICAO)6 which has the responsibility for both setting the minimum standards and for issuing recommendations in relation to international air transport.

At the EU28 level, aviation authorities co-operate in the context of the European Civil Aviation Conference (ECAC)7, an international organisation created with the aim of promoting safety, efficiency and sustainable development in European civil aviation. In addition the European Aviation Safety Agency (EASA)8 is the joint aviation authority that acts on behalf of all the EU28 countries.

All these EU levels and international bodies and organisations pursue the main target of creating and maintaining a uniform and high standard safety-related framework throughout Europe and at global level9.

Finland was recently affected by a large reform of the national aviation legislation, with the update of the Finnish Aviation Act10 of 2016 and following amendments, the main law regulating the aviation sector. In addition to this act and the EU/international laws, Trafi periodically issues more detailed national provisions with the aim of supplementing the other legislations.

The main purpose of the Finnish national regulation is to promote the aviation sector; in fact, through it the Finnish government try to purse its mission to maintain and develop the Finnish national airports network both for civil and military aviation. In this context, the development of the aviation sector is also promoted through the Finnish Aviation Safety Programme (FASP)11: it is the national-level description of the Finnish aviation safety management system. This is particularly relevant for Finland because safety has been set as the principal objective in aviation by Trafi.

Traditionally, airports are owned by the public sector. For this reason, they are, in most countries, mainly managed by the central government: i) directly by the relevant ministry of each country, or ii) indirectly, through an ad hoc, civil aviation entity belonging to the public sector. However, since the 1980s, a reversed trend has started, with private investors getting involved in the management of airports, hence leading to the privatisation of some of the countries’ infrastructure. Finland is among those EU countries which decided to fully centralise both ownership and operations of

5 For more information please see: http://www.aena.es/en/corporate/corporate.html [Accessed 15th February 2018]. 6 For more information please see: https://www.icao.int/Pages/default.aspx [Accessed 16th February 2018]. 7 For more information please see: https://www.ecac-ceac.org/member-states [Accessed 16th February 2018]. 8 For more information please see: https://www.easa.europa.eu/ [Accessed 16th February 2018]. 9 However, some specific aviation sub sectors (i.e. military and state aviation) still mainly remain under national responsibility and regulation. 10 For more details please see https://www.finlex.fi/fi/laki/ajantasa/2014/20140864 (only in Finnish) [Accessed 15th February 2018]. 11 For more information please see: https://www.trafi.fi/en/aviation/finnish_aviation_safety_programme [Accessed 16th Febrauary 2018]. 4

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airports. This centralised model has been chosen by only six EU countries. In the rest of the EU trends boosting privatisation or various public-private partnership models led to the entrance of private investors in the sector.

The decision to maintain a centralised asset management model in Finland was formalised with the creation of Finavia in 1991. The model adopted since 1991 remained the same despite the recent reform of the aviation sector that took place since the 2000s in Finland. In fact, according to the Airports Council International Europe12, all 24 airports in Finland are currently managed by Finavia13, confirming the decision to centralise the airport asset management on a special assigned company.

In this context, the case of Finavia described in this case study can help us understanding the rationales behind both management and governance models for airports in Finland, as well as the main characteristics of the relevant management model.

3. OWNERSHIP AND MANAGEMENT MODEL

Concerning the Finnish central government’s PSHs three main clusters can be distinguished: “financial interest companies” (mainly owned by Vake Oy and Oy), “strategic interest companies” (mainly owned through the Prime Minister’s Office) and “special assignment companies” (owned through the Prime Minister’s Office and other ministries). At the end of 2015, the Finnish state held shares in 63 companies, of which 26 were special assignment companies, while 37 operated purely on a commercial basis (companies operating on a purely commercial basis are subdivided into companies of strategic interest and companies of financial interest).

Finavia is an example of a special assignment company whose main goal is to pursue a customer-oriented management, to maintain a stable profitably growing. A special assignment company is a PSH created by the central government in order to pursue a specific aim, usually related to some central function vital to society. Ownership steering of these companies is exercised by the respective ministries and ministers. In the case of Finavia, the ministry responsible for the oversight of the strategy and tools of the PSH is the Ministry of Transport and Communication. Special assignment companies are expected to be generally financially sustainable and they are often regulated by ad hoc statutes defining in details the ownership and management model.

As for the governance of Finavia, being a special assignment company, it has a specific objective to pursue. On the other hand, the business operations of Finavia are managed on the basis of a strategic plan implemented periodically on market basis. In fact, according to the Section 4 of the Act on the Airport Network and Airport Charges14 Finavia is responsible for the operational decisions on the great part of the airport network, which are formalised in a plan depending on the trends registered in the sector, on the new contracts with airlines and on the main actions of comparables.

12For more details please see: http://newairportinsider.com/wp- content/uploads/2016/04/ACIEUROPEReportTheOwnershipofEuropesAirports2016.pdf. [Accessed 29th January 2018]. 13 The 24 airports managed by Finavia are: Enontekiö, Halli, Helsinki-Malmi, Helsinki-, Ivalo, Joensuu, , Kauhava, Kemi-Tornio, Kittilä, Kronoby Kruunupyy, Kuopio, Kuusamo, , Maarianhamina, Oulunsalo Oulu, Pori, Rovaniemi, Savonlinna, Tampere-Pirkkala, Tikkakoski Jyväskylä, Turku, Utti, Vaasa & Varkaus. The airports managed by Finavia were initially 25. Although at the beginning of 2016, the was excluded from the Finavia network to be transferred to the City of Lappeenranta and the Regional Council of South Karelia. 14 Act on the Airport Network and Airport Charges (210/2011; amendments up to 126/2013 included). Available at: http://www.finlex.fi/en/laki/kaannokset/2011/en20110210.pdf [Accessed 11th November 2017]. 5

Study on State asset management in the EU – Pillar 4 Asset management - Finavia oyj

As the owner of Finavia, the state has a special interest: a business, social, safety and transport policy assignment (service availability and support readiness) specified by the state.

The Ministry of Transport and Communication was the main body responsible for strategic decisions related to the Finnish airport network15, until April 2017. In 2015, it prepared the Finland’s Air Transport Strategy 2015-203016, which establishes the strategic framework for the Finnish airports to 2030.

As for the governance of Finavia:

 its decision-making powers are mainly described by the Companies Act and in the Articles of Association. The ordinary general meeting of shareholders of Finavia is the supreme decision-making body and is held once a year (plus when required by the board of directors). It decided on issues such as legal and operative actions for Finavia to carry out its mission, as well as on the transfers or real estate assets of Finavia itself;  it applies the recommendations of the Cabinet Committee for the setting of the remuneration and pension benefits of company management;  being a special assignment company pursuing general tasks and interests, the Finnish government cannot transfer Finavia’s shares and this is guaranteed by the Finnish Parliament;  it is responsible for operational decisions on the great part of the airport network it manages.

Finavia’s mission is to support airlines and its customers for both maintaining opening up new routes within Finland and to Finland.

4. ASSESSMENT OF PERFORMANCE AND PUBLIC FINANCE IMPACTS

In the following section, we analyse the financial performance of Finavia, tentatively trying to understand its impacts on public finance and on the country, both in terms of citizens and targets achieved. In fact, as it has been stated above, Finavia is a special assignment company that operates to pursue and achieve specific objectives defined by the central government. The analysis has been carried out by using publicly available data.

 Target achievement summary

Special tasks Results

Efficient During the period taken into consideration, Finavia has management of constantly improved its efficiency in terms of revenues/FTE the operations and passengers/FTE. Namely, with the same level of FTE, with regard to both revenues and passengers have increased. company performance In addition, Finavia has also improved its operational efficiency (please see EBITDA Margin in the following and social

15 Ministry of Transport and Communications (2015). Finland’s Air Transport Strategy 2015-2030. Available at: https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/78738/Air_transport_strategy_Julkaisuja_3- 2015.pdf?sequence=1 [Accessed 11th November 2017]. 16 Ibid. 6

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impact section).

Figure 1 Finavia’s efficiency, 2010–2016

Th Eur Th Eur

180 16.000

160

14.000 140

120 12.000 100

80 10.000 60

40 8.000

20

0 6.000 2010 2011 2012 2013 2014 2015 2016 Passengers/fte Revenues/fte Source: KPMG elaborations on Finavia’s annual reports (a) Revenues and passengers refers to Finavia Group, FTE refers to Finavia Corporation The annual reports of Finavia only state that the Air Force Application of and the Finnish Border Guard, for basic services, pay the cost-production price specified in the terms and conditions of service and, prices for the for special services, pay the price agreed that covers airport and air exclusively the costs. Therefore, there not enough navigation information to conclude whether Finavia has effectively services applied a cost production price related to the air navigation required by services that is complaint with the one required by the state aviation state.

Ability to generate cash As it will be shown afterwards, in the period taken into flow in order to consideration, Finavia has always been able to generate finance positive cash flows to finance its operation. operationals

In 2013-2014 Finavia received a capital injection of 200 Mn EUR from the State to finance its 2014-2020 development programme in order to maintain a strong competitive Receiving state position in transit traffic between Europe and Asia. financing only Moreover, in the 2011-2016 period, it also received other for structural State subsidies (around 13 Mn EUR out of the total amount investments of subsidies given to Finavia, i.e. 13 Mn EUR) for structural investments. These subsidies represent only 5% of the total structural investments made by the company in the period analysed.

Legend

= No clear whether the = Target achieved = Target achieved target has been achieved

Source: KPMG elaborations on Finavia’s annual reports.

In order to ensure operational efficiency, Finavia has defined its financial targets and objectives to be met at the end of each year, in terms of:

 Efficiency: prices for passengers must be competitive in comparison with the rest of Europe

 Financial performance: cash flow must ensure operational development and guarantee operational financing

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Study on State asset management in the EU – Pillar 4 Asset management - Finavia oyj

 Equity ratio: it must be at least 40%

 Dividends: dividends must be paid to the State of Finland within the constraints of its financial results and distributable funds

Figure 2 Finavia’s financial targets, 2011–2016

Cash flow from business operations Eur ’s international competitiveness: air traf c charges 2016 – Airbus A320 30.000 CAGR Mn Eur '10 – '16 25.000 97.7 100 +7% 90 20.000 80 75.1 68.4 70 68.1 15.000 60 54.6 50 10.000 40 34.2 30 5.000 20

0 10 RIX TLL VNO HEL ARN WAW OSL DUB CPH PRG AMS BRU KEF LIS MAD BUD LED FCO ATH CDG VIE MUC FRA LHR 0 2011 2012 2013 2014 2015 2016 Mn Eur Equity ratio Dividends 5 % CAGR 4.6 80 '10 – '16 +6% 4 63.1 58.9 58.8 60 3 44.3 46.0 46.9 40 Target 2 1.7 ratio 1 0.8 20 0.0 0.0 0.0 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Source: KPMG elaborations on Finavia’s annual reports. (a) From the left to the right, the 24 airports reported in the figure are: Riga International Airport, Tallin Airport, Vilnius International Airport, Helsinki Airport, Stockholm Arlanda Airport, Warsaw Chopin Airport, Oslo Airport, Dublin Airport, Copenhagen Airport, Prague Airport, Amsterdam Airport Schiphol, Brussel Airport, Keflavik International Airport, Lisbon Airport, Madrid Airport, Busapest Airport, Saint Petersburg Pulkovo Airport, Rome Fiumicino Airport, Athens International Airport, Paris-Charles de Gaulle Airport, Vienna Airport, Munich Airport, Frankfurt Airport, Heathrow Airport.

In terms of financial targets’ achievement, Finavia has always operated efficiently compared to other European airports. In fact, in terms of air traffic charges it has ranked 4th since 2012. In 2011, it ranked 5th. In addition, the cash flows generated have always permitted the financing of the operations. The capital injection of 200 Mn EUR from the State in 2013-2014 was received to support high capital investments. Furthermore, the Equity Ratio has been always higher than 40% in the period taken into consideration, although it is also influenced by the above mentioned capital injection. Finally, in terms of dividens paid, the company has only partially been able to pay dividends to the state, since it distributed no dividends in 2011, 2012 and 2016.

 Financial performance Figure 3 Helsinki airport’s performance, Overall, the financial performance has been revenues, 2011-2016 % of total positive over the 2011-2016 period. Mn Eur revenues 220 56

Revenues have increased, especially 200 because of the great performance of the 180 49 160

140 Helsinki airport (Figure 3). Moreover, as 42 120

referred in the Finland’s Air Transport 100 17 35 Strategy 2015-2030 , Helsinki Airport is 80 60 the only profitable airport in the Finavia 40 28 network and its revenues are used to 20 0 21 2011 2012 2013 2014 2015 2016

Helsinki airport revenues % of total Finavia’s revenues

17 For more detail, please see: https://www.lvm.fi/documents/20181/514467/Air+transport+strategy+Julkaisuja+3-2015/3588a3b3-c99f- 4b0c-bd88-6b269e7f8067?version=1.0 8

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finance the entire network.

EBIT18 has also increased in the 2011-2015 period. In 2016, it has decreased to 2011 levels, mostly due to “Depreciation and Amortisation” of the investments. In fact, the EBITDA margin has also increased in the 2011-2016, showing an efficient management of the activities performed by Finavia. Finally, also the solvency ratio increased in the period taken into consideration, although the growth in 2014 derives from the capital injection by the Finnish state to finance the 2014-2020 development programme.

Figure 4 Financial performance of Finavia, 2010–2016

EBIT Revenues CAGR CAGR '10 – '16 '10 – '16 Mn Eur +3% Mn Eur 0% 400 381 60 56 364 359 353 350 353 350 50 318 45 300 42 42 40 250 33 32 200 30 28 150 20 100 50 10

0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 EBITDA Margin Solvency ratio asset based % CAGR CAGR 80 '10 – '16 '10 – '16 % +3% +5% 30 29.2 63.1 27.9 58.9 58.8 26.0 60 25 23.2 46.0 46.9 20.8 21.3 44.3 44.3 20 18.9 40

15 20 10

5 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: KPMG elaborations on Finavia’s annual reports

 Impacts on public finance

In the period taken into consideration, Finavia has been able to finance all operational activities in all airports under its management thanks to the performance of Helsinki airport, and thus, without any state intervention to subsidise current activities. In fact, the state has intervened only to finance the 2014-2020 development programme and other minor structural investments for a total amount of around 13 Mn EUR19. Moreover, as described above, Finavia has also paid dividends to the Finnish state for a total value of around 7 Mn EUR to “pay-back” the capital received for the structural investments.

18 It has been decided to show EBIT instead of Net Income because it is not influeced by extraordinary items. 19 This amount is additional in respect to the 200 Mn EUR injected by the state between 2013 and 2014. In conclusion the state gives to Finavia grants for 13 Mn EUR and 200 Mn EUR in equity between 2011 and 2016. 9

Study on State asset management in the EU – Pillar 4 Asset management - Finavia oyj

Figure 5 Subsidies from the state to Finavia (excluding 200 Mn EUR in equity)

Public sector's subsidies for investments

Mn Eur 9 8.5 8 CAGR 7 '10 – '16 6 -100% 5 4 3 2.2 2 1.1 0.9 1 0.3 0.0 0 2011 2012 2013 2014 2015 2016 Source: KPMG elaborations on Finavia’s annual reports

 Other impacts

Looking at the number of Finavia’s employees, there is no evidence of a positive impact on this matter, since the average number has remained approximately the same in the 2010-2016 period.

Differently, in terms of passengers satisfaction (calculated on a scale from 1 to 5), all Finavia’s airports obtained a score above the average and Helsinki airport is the one that achieved the best performance. Nonetheless, since 2010 the performance of the other airports has increased at a higher rate, almost reaching the performance of Helsinki airport in 2016. In addition, comparing the average minutes of delays per flight, Finavia’s annual reports show that Finavia has always reached the target objectives and has always performed better than the others in the Single European Sky (SES20) Area. This led to the conclusion that Finavia’s management has impacted positively on passengers satisfaction related to this matter.

Figure 6 Other impacts Number of employees Passengers satisfaction CAGR 4.5 '10 – '16 4.03 4.07 0% 4.02 3.96 4.02 4.0 3.90 3.92 3.89 3.95 2,407 2,413 2,500 2,317 2,394 3.80 2,267 2,239 2,213 3.70 3.60 2,000 3.5 3.40 3.20 1,500 3.0 1,000

2.5 500 2010 2011 2012 2013 2014 2015 2016 0 Helnsinki airport Other airports 2010 2011 2012 2013 2014 2015 2016 Targets for delays and actual delays Min/flight

0.8 0.73 0.7 0.63 0.61 0.6 0.54 0.5

0.4

0.3

0.2

0.08 0.1 0.05 0.03 0.01 0.00 0.02 0.00 0.00 0.0 2012 2013 2014 2015 Finavia’s target Finavia’s actual delay on average Average actual delay in the SES area

Source: KPMG elaborations on Finavia’s annual reports

Table 2 provides a synthesis of the major impacts identified above. The results are presented by means of a RAGS (i.e. Red; Amber; Green; Silver) classification. In

20 For additional information on SES Area please see: https://ec.europa.eu/transport/modes/air/single_european_sky_en

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detail: “Red” stands for a negative impact, “Amber” for no clear patterns for the impacts, “Green” stands for a positive impact/s and “Silver” stands for no data available for the analysis.

Table 3 Summary table of potential impacts

Summary of impacts

Scoring . In the 2011-2016, Finavia has been able to meet both the special tasks defined by the state and the financial targets defined Target internally to meet those special tasks. achievement summary G . In fact, it has been able to operate efficiently enough to be able to generate sufficient cash flows to manage its operations without (relevant) public subsidies.

Scoring . Considering overall financial performance, in the 2011-2016 period, Finavia proved to be Financial both profitable and efficient: revenues, performance EBITDA margin and solvency ratio have A increased since 2011.

. Nonetheless, this performance is driven by Helsinki Airport only, while the other airports performed negatively. Scoring . The Finnish state has not financed Finavia’s operational activities in the 2011-2016 period. In fact, it has contributed to capital increase (injection of 200 Mn EUR) for sustaining the structural investment and has Fiscal impacts sustained structural investments also with A specific subsidies (13 Mn EUR).

. Finally, in the same period, Finavia has also paid 7 Mn EUR dividends to the state to pay back the capital received.

Scoring . Finavia’s workforce has not changed considerably since 2011.

. On the basis of the information provided by Impacts on people Finavia’s annual reports, the company has G increased the passenger satisfaction (already high due to the high level of service), probably also due to the fact that the number of delays have always been lower than other operators in the SES Area.

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Legend

R = Negative impact A = No clear pattern G = Positive impact S = No data available

Source: KPMG elaborations

5. CONCLUSIONS AND LESSONS LEARNT

This case study represents an example of centralised asset management regarding airports in Finland. The main conclusions and lessons learnt from the analysis of the case study could be summarised as follows:

 the airport management model implemented by Finland is peculiar within the EU28 context; Finland is currently one of the six countries at European level which has a centralised model for the management of airports (in addition to Spain, Portugal, Estonia, Latvia and Lithuania), with Finavia being a PSH managing the airports;

 in general, all operational targets set when creating Finavia seem to have been achieved by the company, allowing it to reach some positive outcomes both in terms of improvement in the quality of services and safety;

 the company has reached positive financial results over the period taken into account, driven by Helsinki Airport’s performance.

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