The EU's pie in the sky: New analysis questions further funding support for aviation

A recently published analysis from Bankwatch that examines existing EU funding support for airports in Poland concludes that such EU support for airport infrastructure in Poland and other EU countries has to be phased out in the next EU budget period 2014-2020.

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The study, ‘Flights of fancy: A case study on aviation and EU funds in Poland’, also recommends that EU investments in rail infrastructure should be redirected from connecting airports – particularly smaller ones – to railway lines that serve the mobility needs of regional communities, currently lacking much-needed investment.

According to the Bankwatch study, Poland’s existing airport network is not as dense as those in EU-15 countries. Nonetheless, the network currently manages to satisfy air transport demand and none of the airports have reached their capacity limits. Yet, with EU support of up to EUR 800 million, major investment is taking place in the 2007-2013 budget period, including the upgrading and extensions of existing Polish airports.

As identified in Flights of fancy, of more concern are proposed investments in new Polish airports, most of which are unlikely to attract sufficient traffic in order to be profitable. Their construction is set to increase the burden on regional budgets: regional authorities need to provide co-financing to the EU investments, and as shareholders they will bear the costs of maintaining and operating these airports.

“Only the big Polish airports are financially viable,” says Patrycja Romaniuk, Bankwatch’s EU Funds coordinator in Poland. “The smaller airports do not attract sufficient traffic. In some cases, in order to attract any passenger traffic at all, regional authorities offer payments to airline companies in order to sustain connections. Discounts are also offered to airlines by regional authorities when negotiating airport fees.”

A report compiled in 2011 by a popular aviation portal (pasazer.com) concluded that only Poland’s larger airports (Warsaw, Kraków, Katowice, Gdańsk, Wrocław, Poznań) generate profits, while the remaining smaller airports operate at a loss. Profitability is clearly linked to the number of passengers served – the airport in Poznań, with 1.4 million passengers per year, is slightly above the profitability threshold. The poor financial performance of airports is a burden on shareholders, including those regional and local budgets concerned.

The role of the EU funds in the expansion of Polish airports is even more questionable, Bankwatch believes, when aviation enjoys significant public budget support both in Europe and globally, in spite of the high external costs associated with the sector’s contribution to climate change. The most basic elements of this support currently taking place in the EU are tax exemptions, namely no fuel taxation for the aviation industry, and the zero VAT rating on international air tickets.

Poland has experienced rapid growth in air transport in the last decade, fueled by its accession to the EU and economic development, with 8.8 million passengers in 2004, jumping to 21.7 million in 2011, according to statistics from Poland’s Civil Aviation Office. Almost all existing airports are undergoing expansion and modernisation, while several new regional airports are also to be opened shortly.

As part of Poland’s Operational Programme (OP) Infrastructure & Environment, eight TEN-T airports (Warsaw, Kraków, Katowice, Wrocław, Poznań, Gdańsk, Rzeszów, Szczecin) are set to receive EUR 353 million from the Cohesion Fund for investments aimed at upgrading and expanding their infrastructure. In addition, all airports that serve international traffic can apply for funding under ‘Measure 8.4 – Safety and protection of air transport’. The anticipated allocation for this measure is EUR 50 million from the European Regional Development Fund (ERDF).

Polish airport investments to be co-financed by the EU up to 2013, depicted by allocated amount of funding (in million euros)

Aviation development, but who benefits?

Yet, the ex-ante assessment for Operational Programme Infrastructure & Environment has questioned the rationale of financing air transport infrastructure within the programme.

According to this assessment, air transport was deemed to be a profit-making transport sector, capable of financing its own infrastructure. Public support for air transport was judged to be unjustified given that there is little fiscal commitment from this sector to the public budget. This finding, however, was overlooked: responding to it, the final text of the OP justified the choice to finance air transport infrastructure by the ‘pro-development’ nature of this transport mode.

At the European level, the rationale driving EU support for airport infrastructure from the ERDF has been evaluated for the European Commission as part of the ex-post evaluation of the ERDF 2000-2006. The conclusions from this study are mixed. The evaluated investments in airport expansion have resulted in numerous new connections and are deemed to have stimulated the overall development of the regions concerned, although the provided evidence of this ‘development’ was thin.

The evaluation also mentions certain important reservations about ERDF funding for airports, based on two case studies carried out in Liverpool (UK) and Bari (Italy):

• Investments in airport expansion could have taken place under commercial terms, given the income generated by higher traffic levels.
• New air connections can have a perverse effect on the local economy by providing the residents of the region with the opportunity to spend time and money elsewhere.

Returning to the Polish context, the European Commission, as well as experts from JASPERS (Joint Assistance to Support Projects in European Regions), have already played a significant role in limiting the number and scope of planned airport investments with EU funds:

• The original proposal for the Regional OP in Świętokrzyskie envisioned a regional airport near Kielce, though this was rejected by the European Commission.
• A new regional airport near Opole was included in the Regional OP for Opolskie, but was abandoned after input from JASPERS.
• JASPERS experts suggested the downsizing of the terminal for the new Lublin airport – following this intervention, the planned terminal was downscaled from 23,000 to 11,000 square metres.
• Authorities in the Lubuskie region planned to allocate PLN 20 million obtained by the region in 2011 from the performance reserve of EU funds for investments in the regional airport (Babimost, near Zielona Góra) – however this proposal was deemed controversial by regional politicians and rejected by the European Commission.

Connecting the dots rather than communities

According to the Bankwatch study, EU investments for rail links to airports have a questionable rationale, particularly those connecting the smaller airports. One of the most questionable examples is in the Warmińsko-Mazurskie region.

The only railway upgrade – of any sort – being carried out under the
Regional OP for Warmińsko-Mazurskie involves the linking of the regional capital Olsztyn with Szymany, a planned new airport site, and will cost
over PLN 100 million.

The investment in the airport itself has not yet started and its finalisation within the current EU funds programming period is not certain. Even if completed, the airport is not likely to attract a sufficiently high number of connections and passengers to justify the demand for a dedicated train connection.

Bankwatch coordinator Patrycja Romaniuk says, “This EU funding could have been used for other railway upgrades, based on an assessment of the most urgent needs and the potential to attract passengers.”

Find out more:

‘Flights of fancy: A case study on aviation and EU funds in Poland’ is available in pdf at:
http://bankwatch.org/publications/flights-fancy-case-study-aviation-and-eu-funds-poland

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