Too Big to Fail : Saving NAC from the Claws of Greed

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Too Big to Fail : Saving NAC from the Claws of Greed

The ongoing crisis presents an excellent opportunity to steer the ailing airlines to a new direction of growth and sustainability.
 
--BY NEWBIZ TEAM
 
In August 2016, when the Nepal Airlines Corporation (NAC) decided to start process of purchasing two Airbus wide-body aircraft for long-haul flights, a bright light of hope for a revival of the struggling national flag carrier was seen at the horizon. Fast forward two years and what was supposed to be a jubilant celebration of the expanding wings of the airliner after the purchase of the two aircrafts, is now among the most controversial decisions in the public procurement history of Nepal. Mired in allegations of corruption in the procurement process, the purchase has landed NAC into hot waters of controversy attracting attention of media, lawmakers and ordinary citizens. 
 
Claims and Counterclaims
The procurement of the two Airbus A330-200 passenger jets by NAC has been coined as the largest deal in the aviation history of Nepal. NAC paid the consortium of three companies led by the AAR Corp, a US based independent aviation company, a sum of USD 209.6 million (Rs 24 billion) for the purchase of the two planes. 
 
The first A330-200 plane named “Annapurna” with the call-sign9N-ALY arrived on June 28, 2018, followed by the landing of another named “Makalu” with the call-sign 9N-ALZ later on July 26. 
 
However, a series of reports prepared by bodies of government and the federal parliament over the course of the last few months have mentioned that the aircraft deal went through very dubious circumstances and the rules set by the Public Procurement Act have been explicitly breached. The latest report is from the sub-panel comprising of seven lawmakers formed by the Public Accounts Committee (PAC) of the federal parliament on December 12 to probe the allegations of corruption. The sub-panel, led by the Member of Parliament Rajendra KC, has claimed embezzlement of Rs 4.35 billion (in current foreign exchange rate terms) in the procurement of the two Airbus planes. Breaking down the amount, the report has stated that NAC lost USD 8.4 million in procurement, USD 23.6 million in estimation cost and buying price, USD 6.8 million in accepted price and USD 100,000 in pre-inspection of the planes. 
 
The amount, according to the report, is the largest misappropriation of fund in the six decades long history of the national flag carrier. The 57-page report has recommended taking legal action against some top NAC and government officials, including the current Minister for Culture, Tourism and Civil Aviation Rabindra Adhikari and two former ministers – Jeevan Bahadur Shahi and Jitendra Dev, who have been alleged with the wrongdoings. The report has indicated a number of irregularities in the aircraft deal, ranging from supply of aircraft by a special purpose company (SPC) called HiFly X Ireland Limited established in Ireland, violation of provisions of the Public Procurement Act, 2007, payments made to the supplier through an Escrow agent, issues related to the ownership of the planes, involvement of middlemen in the procurement process, gaps in technical specifications and build of the planes supplied, among others. The probe panel in its investigation found that a team comprising of 38 NAC officials, a majority of whom were from the Finance Department, went to France in mid-2017 to study the wide-body aircraft of Airbus spending Rs 10 million during the visit. 
 
In December, the Public Procurement Monitoring Office (PPMO), a unit under the Office of the Prime Minister, also claimed the purchase haS breached the Clause 2 (C) of the Public Procurement Act, 2007.“As per the Clause 2 (C) of the Public Procurement Act, 2007, an airplane also is categorised as goods which cannot be procured through means other than the competitive bidding,” stated PPPMO in its report. NAC procured the two wide-body planes using the request for proposal (RPF) process. The allegations of wrongdoings in the aircraft deal began to grow louder after the Office of the Auditor General (OAG) published its 55th annual report in September. In the report, OAG alleged that NAC has flouted the laws of the country including the provisions of its own financial bylaw. 
 
 
However, officials at NAC refute all claims of misdeeds in the procurement of the two wide-body Airbus aircraft. Sugat Ratna Kansakar, managing director of NAC, who is at the center of the current controversy, claims that the procurement process went ahead in a very transparent manner. “The request for proposal (RFP) process is in line with our public procurement law. Besides, we have been using the RFP process for decades for aircraft procurement,” he says. According to him, four years ago NAC bought two Airbus A320 narrow-body planes using the same procedure. “There was not any issue with the procurement process until the wide-body aircraft landed here,” he expresses.
 
Ownership of the two Airbus A330-200 has become one of the controversial issues. It has been alleged that the Bill of Sale of the two aircraft is fake and NAC’s failure to produce original documents indicates that the Airbus jetliners are taken on a lease by the corporation. Nevertheless, Sanjeev Gautam, director general of Civil Aviation Authority of Nepal (CAAN), says that NAC has the ownership of the wide-body aircraft. “On the basis of the documents, we have registered the planes and provided NAC with theownership certificates of the Airbus aircraft,” he mentions. Under the condition of anonymity, a top source at NAC also claimed that the full ownership of the planes remains with NAC. “The ownership of the planes was transferred to HiFly from Airbus, and from HiFly it was transferred to NAC. Based on the ownership, NAC paid customs duty to on the import of the planes and pledged to the Employee Provident Fund (EPF) and the Citizens Investment Trust (CIT) against the loans. NAC borrowed Rs 12 billion each from EPF and CIT for the purchase of the planes. 
 
The report published by PAC’s sub-panel has stated the arrangement of the Escrow agent as a ‘drama’ to misuse the fund. “There is no arrangement of an Escrow agent in the Memorandum of Understanding (MOU) signed by the NAC and the consortium. The appointment of the Escrow agent for the payment and creating a company (HiFly X), which is unable to even ensure the bank guarantee of the planes, is dramatic,” reads the report.  NAC, the consortium of the aircraft supplier, Norton Rose Fulbright LLP, a London-based law firm, and another law firm from Germany, later signed a separate Escrow agreement for the payment. But the NAC source defended the use of Escrow agent in the payment process. “Opening of Escrow account is an international practice in case where there is no bank guarantee by the supplier. Escrow account procedures are also followed by other institutions in Nepal to secure advance money,” the source claimed.  
 
There are also suspicions related to the business plan prepared by NAC regarding the newly bought Airbus planes. According to several sources, the airliner has submitted a detailed business plan to the government as well as the two lenders to obtain the loans. The government has become the guarantor in process. But the business plan has not even been presented before the PAC and the sub-panel formed by it to investigate into the topic matter. Several attempts made by New Business Age to get the document of the business plan were unsuccessful. 
 
 
The Consortium and HiFly X
NAC’s financial bylaw mentions two clauses for aircraft procurement: 236(1) and 236(2). As per clause 236 (1), only the manufacturers are eligible to participate in the bidding process to supply brand new planes to NAC. Clause 236 (2) allows it to get a supply of used aircraft from a leasing company, holding company or airline operator besides the manufacturer. “We opted for clause 236 (2) as the manufacturer Airbus told us that it was unable to supply a wide-body aircraft to us before 2020 because it had to fulfill the existing orders by then. As preparations are underway to celebrate 2020 as the Visit Nepal year, we had no other option than to procure the aircraft from a third party,” says NAC MD Kansakar. “The high tourist inflow means we need more planes now to add flights to several existing destinations and fly to new places throughout the world. We started the procurement process with a view to provide efficient services to air travellers and also to capitalise on the emerging business opportunities in the airlines industry,” he adds. Following the unanimous decision of the meeting of NAC board of directors held on September 24, 2016, the corporation on September 26, 2016, initiated the RPF process asking for sealed quotations for the supply of two A330-200 jets.  
 
By November 2016, NAC received proposals from 11 international aviation firms, namely AAR Corp, Aircraft Investment Group, Rolls-Royce, KL AeroParts, Synergy Aerospace, Surya Air Support, KJT Investment & One World Closeouts, Crown Commercial Services, ST Aerospace and Ron Motta Associates Aircraft Sales & Parts and Le Group Delta. It was on April 7, 2017, NAC singed a MOU with the AAR Corp for the contract to supply two Airbus jets worth USD 209.6 million. In the bidding process, AAR Corp represented a consortium of three companies which includes the Portuguese airline operator HiFly and German Aviation Capital, a German aircraft management company. After the consortium was awarded, an entity named HiFly X Ireland Limited was established to supply the Airbus planes.
 
Lawmakers allege that the involvement of HiFly X made the procurement even more dubious as the existence of such an entity wasn’t mentioned by the consortium in its bid document. But, NAC MD Kansakar says that HiFly X’s engagement has not made the process opaque. “In the MOU, the consortium mentioned that it will establish a special propose company (SPC) in Ireland. Initially, we thought that there was something wrong with the proposal and discussed why AAR chose Ireland for establishing the SPC,” he claims, adding, “We found that Ireland is among the countries with lowest corporate tax rates in the world. We also noticed that many top aircraft leasing companies have established SPCs in Ireland due to the relaxed related provisions.”  
 
A History of Scandals
Scandals are nothing new at NAC. In the past, high profile scandals like Dhamija, Lauda, Chase Air and China Southwest have shaken the airliner to its core resulting in loss of billions of rupees. The appointment of the Dinesh Dhamija, a British businessman of Indian origin, as the GSA for Europe to sell air tickets of NAC worth Rs 550 million in the early 1990s, caused a loss of Rs 400 million to the national flag carrier.  In the Chase Air scandal, NAC lost Rs 100 million to a bogus agent while taking a Boeing 757 on a lease. Based on fax communiqués, NAC made advanced payment to the agent to take aircraft on lease from an airlines called Chase Air. The agent ran away with the money, but later with the help from an American lawyer of Nepali origin some of the amount was recovered.  Similarly, in the late 1990s, NAC suffered a loss of Rs 220 million due to a lease agreement with the China Southwest Airlines. The selection of the Chinese airliner without competitive bidding was considered as the main reason for the financial loss. The Lauda Air scam of 2000 is another big misconduct in NAC’s history. Lauda Air, an Austrian airliner, leased the plane to NAC for USD 1,150 per flight hour, which actually turned out to be USD 5,000 for each flight hour causing a loss amounting to Rs 2 billion to the national flag carrier.  
 
The vested interest of several groups is the major role-playing factor fueling corrupt practices in NAC. The people in such groups have been hiding their faces behind various masks so that they can get more financial benefits from the aircraft purchase and lease deals that are largely opaquein nature. From politicians, local representatives of foreign airlines operating in Nepal who are known as general sales agents (GSAs), to high officials of NAC and the government, the corporation has remained as a milking cow for many for several decades. As an entity which owns and manages assets worth billion of rupees, many dishonest politicians, government officials and businessmen in the Panchayat, Multiparty Democracy and Republic eras have misused the resources of NAC for their personal benefits causing a deceleration of the airliner’s growth. The lack of accountability among the people in the government is what hits the NAC hard. Only a very few culprits in the corruption cases in the past were indicted or sentenced according to the laws. Others were simply let go with minor punishments such as removal from their posts and department level actions.    
 
 
On the Verge of Collapse
Years of mismanagement have contributed to the deteriorating financial health and institutional capacity of NAC. With a debt burden of over Rs 38 billion, largely contributed by the purchase of A330-200s, the state-owned airliner now stands at a crossroads. The condition of NAC became clearer when it requested the government for financial support in mid-November. Issuing a “white paper”, the corporation has mentioned that its cash flow has sharply declined due to the high operation costs of the newly purchased Airbus aircraft.  According to the paper, NAC spent Rs 756 million for the operation of the planes from August 1 to September 15, while its earnings from the two aircraft during the period amounted just to Rs 264 million. “We need immediate financial support from government in order to stay afloat. The government should increase the authorised capital which stands at Rs 300 million,” urged Madan Kharel, executive chairman of NAC during a press meet held on November 15 in the capital. Currently, the corporation’s debt to equity ratio is at 14.40:39.82.  “Our cash flow situation has become very hard to manage as we are required to pay the debt at a rate of 10.5 percent per annum,” informed Kharel.  However, given the ongoing procurement related controversies, it seems unlikely that the government will provide financial assistance to the ailing airliner. NAC in September 2017 proposed the Ministry of Culture, Tourism and Civil Aviation (MoCTCA) for capital injection of Rs 20 billion, which was declined by the ministry. 
 
Bringing NAC Back from the Brink
Since its inception in 1958, NAC has remained as a wholly owned government entity. This is considered as one of the main reasons for the mismanagement in the airliner. Over the years, there have been calls for the privatization of the airliner.  Such voices were ignored due to the political instability and wicked intentions of vested interest groups. The ongoing controversy over the procurement of the Airbus A330-200s has presented an opportunity for the government to mend its ways to take out the airliner from crisis and enable it to stand on its own feet again.   
 
In an apparent sign of change, the government in early December hinted that it is planning to divest its stake in NAC. Dr Yubaraj Khatiwada, minister for finance, has recommended 51 percent divestment of the stake of NAC to private investors and general public. The government is yet to take any decision in this respect. Likewise, the government is also said to be introducing a strategic partner in the airliner. A due diligence audit (DDA) is underway at NAC which is expected to bring the true financial picture of the corporation and help the government to take necessary steps. Meanwhile, the government is also said to be planning to turn NAC into a company by registering it under the Companies Act. Doing this has been considered necessary to bring strategic partners in the flag carrier.  Some foreign airlines including Qatar Airways, Turkish Airways and Ethiopian Airlines are said to have expressed their interest in becoming the strategic partner in NAC. Past experience also show that the introduction of a strategic partner can positively impact operations and institutional capacity of the airliner.  In 1970, the then Royal Nepal Airlines Corporation (RNAC) invited experts from Air France under a programme to improve its management. In 1972, RNAC acquired its first jet, a Boeing 727, in cooperation with the French carrier. The French experts handled most of the managerial positions in the corporation until 1973. 
 
Looking at the long history of political interference and mismanagement, privatisation of NAC seems to be the best option for its improvement.  At present, NAC has become a ‘too big to fail’ proposition. A large chunk of money of the general public is at stake as the corporation has taken Rs 24 billion from EPF and CIT for the procurement of the two Airbus planes. Similarly, the existence of NAC is also tied to the pride of the nation as it is the flag carrier of the country. Bringing it back from the brink needs to be the main concern of the government and other stakeholders. A course correction is needed from the government side to make the NAC financially profitable and sustainable for the long-run. 
 
 
 

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