Holes seen in house panel report on jet purchase deal

Kathmandu, January 11

The report of a parliamentary committee, which has exposed embezzlement of over Rs 4 billion in the purchase of two wide-body aircraft, contains serious holes, raising doubts over prospects of bringing those involved in one of the country’s biggest corruption scandals to justice.

While the report contains severe flaws, it has highlighted a number of issues, which can work as stepping-stones for concerned agencies, such as the corruption watchdog, to launch fresh investigation into the purchase deal and draw conclusions.

The parliamentary Public Accounts Committee (PAC) this week endorsed a report, which was prepared after conducting a detailed investigation into the process of purchasing two Airbus A330-200 aircraft by state-owned Nepal Airlines Corporation (NAC).

Based on this report, the PAC has sought action against a number of senior government officials, including tourism secretary, and NAC Managing Director Sugat Ratna Kansakar, accusing them of playing a role in financial irregularities of $38.8 million (approximately Rs 4.36 billion) during the purchase of two aircraft.

The biggest irregularity, according to PAC, was performed by miscalculating the estimated price of A330-200 at the time of floating the tender notice to purchase the aircraft. This inflicted losses of $23.6 million, says the PAC report. But investigation shows this figure is not accurate.

When NAC initiated the process of purchasing two narrow-body aircraft directly from Airbus in 2009, it had also sought prices of A330-200, or wide-body, aircraft. The price submitted by Airbus for each A330-200, on January 2008 delivery conditions, was $88.1 million per aircraft, including discounts. The same price was mentioned in the memorandum of understanding signed between NAC and Airbus on November 5, 2009.

NAC has used the 2008 price as a reference to derive the estimated cost of each wide-body aircraft. The estimated cost price was set using price escalation rate of 2.7699 per cent per year. In other words, 2.7699 per cent was added to $88.1 million every year from 2008 to 2018. Based on this formula, the estimated price of first wide-body aircraft to be delivered in June 2018 was set at $117.38 million and second wide-body aircraft to be delivered in July 2018 was set at $117.65 million.

The price escalation rate of 2.7699 per cent was derived by taking into account five-year average of cost escalation of airframe and engine, which was provided by Airbus.

The PAC has not made any comment on the formula used to obtain price escalation rate of 2.7699 per cent, indicating it has approved the rate. But it has applied this rate only twice since 2016 to derive the estimated cost price of wide-body aircraft. So, based on PAC’s calculation, estimated cost price of each wide-body aircraft should not exceed $93.05 million (i.e. $88.1 million + 2.7699% = $90.54 million + 2.7699% = $93.05 million).

On the other hand, the preferred bidder had initially agreed to supply each aircraft at $104.8 million.

Based on this price quotation, PAC has deducted $93.05 million from $104.8 million to get a difference of $11.8 million. This difference of $11.8 million, according to PAC, is loss suffered by NAC on purchase of each wide-body aircraft. Double this amount and loss incurred in purchase of two aircraft stands at $23.6 million.

Why did cost price estimates of PAC and NAC vary?

This is because PAC has used 2008 price of $88.1 million as estimated cost price of 2016 — the year when NAC publicly issued a notice to purchase two wide-body aircraft. This implies PAC failed to factor in price hike that took place in between 2008 and 2016 when calculating estimated cost price of aircraft.

How did NAC make this mistake? Because it cherry-picked data included in a report prepared by NAC’s sub-committee. That report says the price of $88.1 million was mentioned in the memorandum of understanding between NAC and Airbus signed on November 5, 2016. The year should have been 2009 and not 2016. Although the same report also says the MoU was signed on November 5, 2009, PAC has not referred to this date.

This means a typo prompted PAC to miscalculate the estimated cost price of wide-body aircraft.

“We did the calculation based on what was mentioned in the sub-committee’s report,” PAC Secretary Roj Nath Pandey said. “We didn’t even bother to find out whether an MoU was signed between NAC and Airbus in 2016. Our concentration was solely on deals between NAC and the aircraft supplier.”

While PAC has concluded that estimated cost price of each aircraft should not have been more than $93.05 million, it has later referred to the initial price quoted by aircraft supplier, which is $104.8 million, to conclude embezzlement of another $6.8 million.

NAC had actually invited bidders to supply second-hand aircraft manufactured after January 2014 with a maximum 1,000 flight hours. Based on this, AAR Corp, which had quoted a price of $104.8 million per aircraft, was selected as the preferred bidder. When the deal was signed, the two aircraft were supposed to be delivered in December 2016 and February 2017. But due to delays made by the government, the delivery dates were pushed to June and July 2018. So by the time the aircraft were supplied to NAC, price of each wide-body jet had escalated to $108.2 million. In other words, NAC had to pay $3.4 million extra to purchase each aircraft, meaning the state-owned airline company had to fork out an additional $6.8 million to purchase two aircraft.

PAC has referred to the extra payment as loss of $6.8 million. PAC has argued that extra payment should not have been made because request was made to purchase second-hand aircraft.

“But everyone knows the two aircraft came fresh out of the Airbus factory,” said a senior NAC official. Documents obtained by THT also show the airframe and engines of two wide-body aircraft are new.

Another issue raised by PAC is decision to procure aircraft with maximum take-off weight of 230 tonnes as against the proposed 242 tonnes. This oversight, according to PAC, caused losses of $8.4 million.

PAC has said it costs $350,000 to enhance payload capacity of Airbus 330-200 by each tonne. Based on this, it has said payload capacity deficit of 12 tonnes (240 tonnes minus 230 tonnes) results in loss of $4.2 million in each aircraft, and a loss of $8.4 million in two aircraft.

Airbus did not say how much it costs to increase maximum take-off weight of Airbus 330-200 by every tonne. It only said, “It is a part of the negotiated agreement.”

So how did PAC come up with the figure of $350,000?

“We took it from the bid document submitted by KJT Investments/One World Closeouts, which took part in wide-body procurement process,” said PAC Secretary Pandey. The document mentioned by Pandey was seen by THT. But it does not clearly mention whether $350,000 is the cost required to increase maximum take-off weight by 12 tonnes or each tonne.

Despite this, documents provided by Airbus show that each of the wide-body aircraft procured by NAC is technically sound to carry maximum take-off weight of 242 tonnes. This has been verified by Sanjiv Gautam, director general of the Civil Aviation Authority of Nepal, the civil aviation regulator.

But in an e-mail sent by Ilari Haakana of Airbus to one of the NAC officials, Airbus has recommended that NAC not configure the maximum take-off weight of its aircraft to 242 tonnes, stating it will add cost burden of $274,000 per year because of higher maintenance, landing and navigation costs. Thus, ‘the planned network doesn’t require maximum take-off weight of above 230 tonnes’, the e-mail seen by THT says.

Yet, PAC has said each wide-body aircraft must have maximum take-off weight of 242 tonnes to conduct flights of over nine hours.

“With 230 tonnes of maximum take-off weight, the aircraft cannot fly directly to destinations such as Sydney,” said Pandey. NAC, however, has said the configuration can be changed to 242 tonnes anytime. “But to change that configuration NAC will have to pay extra. That’s why we said there was financial irregularity,” said Pandey. But NAC argued it had not mentioned 242 tonnes of maximum take-off weight as a requirement in the bid document in the first place. “So, we were not seeking jets with maximum take-off weight of 242 tonnes,” said a senior NAC official.

If those jets cannot conduct long-haul flights, then why did NAC initiate the process of purchasing wide-body aircraft in the first place, Pandey questioned.

Despite confusions and shortcomings, the PAC report has detected stench of corruption wafting over the A330-200 purchase deal. It has thus said everything will be clear once Airbus tells how much it received from the supplier of two wide-body aircraft. PAC has already told the Ministry of Foreign Affairs to write to Airbus and get details of payment that it received.

“Airbus has not responded so far,” said Pandey. “And it is not obliged to respond because we are not an authorised body to conduct investigations into corruption cases. But if the Commission for the Investigation of Abuse of Authority, the corruption watchdog, takes up this case, Airbus will have to furnish answers. We now want CIAA to probe the case as we have laid the groundwork for that.”

PAC concluded embezzlement of $38.8 million (nearly Rs 4.36 billion) on following grounds:

  • Miscalculation of estimated price of A330-200 before publishing request for proposal notice, which, according to PAC, inflicted losses of $23.6 million
  • The decision to procure each aircraft with maximum take-off weight of 230 tonnes as against the proposed 242 tonnes, which caused losses of $8.4 million
  • Misuse of price escalation formula, which caused losses of $6.8 million