The Weird $2b PIA
Deal Which has Raised a Billion Questions
By M. Malkham
ISLAMABAD:
The European Community is up in arms against Pakistan, cutting
down its textile quotas. Half of the Jamali cabinet, and some
outgoing ministers of the Musharraf Cabinet, are dumb struck.
Every one knows and believes Pakistan has committed a grave mistake
by buying 8 US Boeing 777 aircraft under Washington’s pressure.
The
two billion dollar deal, in hush-hush and mysterious circumstances
has yet to be explained by the finance and aviation managers of
Pakistan. But before they do so, the European Community has already
protested and cut almost $ 24 million worth of Pakistan’s
textile quotas, duties are being raised on more than 100 items,
and anti-dumping measures are in the works.
“In
a dramatic about turn, Pakistan International Airlines (PIA) has
announced that it will buy US-made Boeing 777s instead of the
French-made Airbus-310 in a major overhaul of the national carrier.
At the weekend, in leaks to the local media, PIA indicated that
it would buy the French craft. However, in a move that reflects
deep divisions within the PIA board, the decision was reversed
24 hours later,” Asia Times reported as early as
August 28. Click here for Report
Pakistan’s
new Commerce Minister, Humayun Akhtar Khan, is rushing to the
EU countries immediately after the Ramadan Holidays to talk about
these cuts but he is not very happy with the Boeing deal himself.
What can he offer the EU countries is hard to guess. But Opposition
Parties in the National Assembly are preparing to take on the
left overs of the Musharraf cabinet on this issue in a major political
battle as they try to get back power from un-elected favorites
of a dictator.
Pakistan
International Airlines, which bought six Jumbo jets from Cathay
Pacific Airlines in July this very year, took off in a whiff and
signed a deal with the US for another 8 long haul aircraft, specially
at a time when other world airlines are getting rid of similar
aircraft in view of slump in the aviation industry. The deal was
signed amid conflicting statements issued by PIA officials. Some
said four aircraft were under consideration, then the figure became
six and when the deal was signed, it was for eight 777s.
"We
have proposed to buy four Boeing 777 aircraft and the proposal
is being processed by Ex-Im bank," Imran Gardezi, the airline's
general manager for media affairs said, in a report published
by the Aviation Times on October 23, 2002. Click
Here for Report
According
to a leading Pakistani newspaper, the Boeing 777s Pakistan has
purchased at $250 million a piece were being offered by a US airline
at $86 million a piece. And naturally no one was asking for cash.
Loans would have been available, as are in the present case. So
why pay three times more price per piece is the big question no
one has answered.
But
an earlier story in the Asia Times gave hugely different
figures. It said: "The US Import and Export Bank has shown
a willingness to provide 60 percent financing if PIA opts to buy
Boeing craft, while the manufacturers of the A-340 Airbus have
offered to make available 75 percent financing if their craft
are bought. Click Here for Report
"With
this knowledge, the PIA constituted an evaluation committee headed
by Air Vice Marshal Salim Arshad, which traveled to Seattle and
Paris to assess the purchase of either the Boeing or the Airbus.
"Boeing
has offered three new 777-200ERs for delivery in 2003-04 at a
cost of $120.96 million to $127 million each. Airbus has offered
two new A-340-300 white bodies at $101.9 million each and two
white tail A-340-300s at $84 million each.
According
to a leading Pakistani newspaper, the Boeing 777s Pakistan has
purchased at $250 million a piece were being offered by a US airline
at $86 million a piece. And naturally no one was asking for cash.
Loans would have been available, as are in the present case. So
why pay three times more price per piece is the big question no
one has answered.
A
sources in Foreign office confided that it had been conveyed to
Pakistan in so many words because EU is under pressure from member
states to review concessions given to Pakistan. According to an
EU diplomat ‘We feel betrayed by the PIA deal, , we think
PIA went back on a gentleman's agreement with Airbus and buckled
under political pressure from US. We feel since we had helped
Pakistan at the time of its need, Pakistan should have been more
considerate in dealing with us.’
According
to aviation experts Pakistan has done the biggest deal ever with
the US Boeing Company. PIA Chairman Hamid Nawaz Khan finalized
the deal but the civilian MD Ahmed Saeed conveniently absented
himself to avoid future accountability.
According
to ‘Dawn’, PIA was already in an air pocket and was
being sucked down after 9/11. “Uncertainties in the region,
particularly the war-like situation between Pakistan and India
and the closure of Indian air space since January 1, 2002, had
resulted in the stoppage of the PIA operations in the regional
market, adversely affecting the traffic and revenue generations.”
The
government had already injected Rs500 million in 2001 to improve
the liquidity of the airline and keep it in air, and then subsequent
to June 2002, a further equity of Rs400 million was injected by
the government.
After
9/11, the timely sovereign indemnity provided by the government
to the National Insurance Company (NIC) saved the airline from
huge insurance premiums which had risen from $12 million annually
to $40 million. The Corporation incurred accumulated losses of
Rs12.02 billion up to June 30, 2002 as against the share capital
and reserves of Rs8.01 billion.
As
of that date, the current liabilities exceeded its current assets
by Rs15.86 billion. In order to address the above problems and
to enable the Corporation to meet its liabilities when due, the
government firmed up a generous financial package, increasing
the burden on the budget. Under this package it issued guarantees
for raising long-term loans of Rs20.5 billion. Next it made a
commitment to provide equity contribution to the Corporation over
the next four years to cover the interest payments on the above
loan up to a cumulative contribution equivalent to the accumulated
losses of the Corporation.
As
part of the above financial packages, the Corporation has obtained
a short-term bridge financing of Rs4.73 billion and Rs4.9 billion
in the form of restructuring of the existing debt into long-term
debt with five years maturity from the commercial banks secured
against the guarantee issued by the government during the financial
year 2001. The short-term bridge financing has been rolled over
during the period. The Corporation has incurred interest amounting
to Rs900 million on the financing obtained as interest costs during
the period from August 2001 to June 2002.
What
has the Corporation done with all this financial injection from
the budget? Well, the first thing it did was to window-dress the
balance sheet to show a profit after tax of Rs447 million (a paltry
$7 million). Next on the basis of this so-called profit (it makes
one wonder how a company which has accumulated losses of Rs12.02
billion and the liabilities of Rs15.86 billion can even think
of talking of profits), the board of directors decided to distribute
if not the entire profit, but at least a substantial chunk of
it among themselves as bonus.
This
is the first time in the last 15 years for the airline staff to
receive a bonus and that too, very very generous - even the lowliest
employee received around Rs10,000. No one would grudge this for
the low employees but it should have been based on the real profits,
not on window-dressing. But all this was peanuts.
The
profit was shown not for the bonus distribution but to justify
a $2 billion deal which would have been unthinkable for a losing
organization like the PIA, otherwise. The decision is to buy 8
Boeing aircraft at a total cost of $2 billion most of which will
come as loans from the US Exim Bank and the down-payment too,
amounting to $150 million has been arranged through commercial
loans. The PIA has proudly announced that it has awarded the UBL,
the Citibank and the Islamic Development Bank the mandate and
arrange $150 million to finance its fleet replacement program.
The
financing envisages a one-year facility of $85 million to be replaced
by a three-year facility of $150 million. In the $85 million facility,
the UBL and the Citibank/Saudi American bank have underwritten
$45 million and 4$0 million, respectively. The IDB has agreed
to underwrite $70 million in the three-year facility.
On
November 14, only two days before the coming into being of an
elected parliament after a lapse of three years, the Chairman
PIAC and the Secretary Defence signed a deal in Washington DC
for 8 Boeing 777s. The order includes three 777-200ER, two 777-200
LR and three 777-300 ER aircraft for use on the PIA's long-haul
routes. Deliveries are scheduled to begin in 2004 and will continue
to 2008.
According
to one aviation analyst what has surprised him was that the PIA,
which has just acquired from the Cathy Pacific six Boeing 747-300's,
a long-range aircraft, has now sought an outright purchase of
8B777 which is also a long-range aircraft. Everybody, and his
auntie knows that the revenue earning sectors of the PIA have
always been the Gulf and the Middle East sectors. And there has
also been a steady growth in revenue on the PIA's Manchester route.
But the Trans-Atlantic sectors are not on break-even level because
of fierce competition. It does not, therefore, make financial
sense for an airline like the PIA to acquire such a large number
of long-range aircraft which would be economical only on trans-atlantic
route.
The
PIA Board of Directors have claimed that the B777 due for delivery
in 2004 will replace the A300 B4 aircraft, a medium-range aircraft
with a spacious underbelly cargo carrying capacity that makes
it ideal for use on the Gulf and the Middle East sectors. But
then the question is how does the airline plan to repay the mounting
debt when the routes on which these aircraft are to fly are not
breaking even.
How,
and via which route has the Board of Directors reached to the
laughable conclusion that the airline's passenger traffic would
grow at the rate of 3 per cent between 2000-2011 and its cargo
traffic would grow at the rate of 7.5 per cent during the same
period is not known. Aviation experts question these assumptions.
These
experts also recall that the PIA management had earlier claimed
that the total cost of 8 new Boeing 777 would be under $900 million
only! It is said that the United Airlines, a US airline company
after canceling its fleet replacement and expansion program due
to massive recession in the international airline sector had offered
to sell three new B777 to the PIA at a price of $86 million a
piece (against $250 million a piece the PIA will be paying to
the Boeing company under the deal it had inked on November 16),
and was also willing to further reduce it by another $5 million.
And
according to another source when the airline market was growing
steadily before 9/11, and when there was no stagnation in the
aircraft making sector, many airlines had booked orders for the
same type and make of aircraft at prices lower than what Pakistan
has agreed to pay now for the same aircraft when the aircraft
industry is facing a serious slump in orders.
The
aircraft manufacturers have never been so pressed for seeking
new orders than they are today. So, the argument that we are getting
them cheaper in a declining market also does not hold. And looking
at the actual projections of growth in the passenger and cargo
traffic in the coming years, it is impossible to believe that
the PIA would earn enough from the new addition to meet its amortization
obligations in time without the help from the budget.
So,
why this deal? And that too at a time when Pakistan's economy
is still in the grips of stagnation and we are obliged under the
IMF conditionalities to reduce as much as possible the burden
on the budget by privaitizing anything and everything which the
public sector cannot handle without the budgetary support?
