Sugat Ratna Kansakar
Managing Director
Nepal Airlines Corporation
The procurement of two wide-body aircraft has been mired in controversy. What went wrong with the procurement process?
The procurement process was started around two years ago. After the bidding process for the supply of the two wide-body aircraft was finalised about one year ago, the Public Accounts Committee (PAC) of the Federal Parliament sought clarification from us regarding the allegations. PAC was satisfied with our clarification and the issue was not raised again for a year. Around 13 months ago, a similar complaint was registered at the Commission for the Investigation of Abuse Authority (CIAA).
CIAA asked us to clarify the deal and we submitted our clarification. We had thought the procurement process would not raise any controversy because the bidding process was carried out in accordance with the International Competitive Bidding (ICB) procedures of the World Bank. We initiated the Request for Proposal (RFP) process which is commonly practiced in the global aviation industry for bidding purposes. RFP is in line with our public procurement laws. Besides, we have been using the RFP process for decades for aircraft procurement. Earlier, we 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.
Now we are even being questioned for selecting planes with Rolls Royce jet engines. The decision of buying planes with Rolls Royce was made because we wanted to ensure high level of safety in flights. Aircraft with highly efficient Rolls Royce engines are suitable for places like Kathmandu Valley where the planes need to attain height quickly after their take-off.
But the narrow-body planes were purchased from the manufacturer Airbus directly, whereas the wide-body aircraft were bought from a third party which is a consortium led by an American supplier. What led NAC to buy the planes this way?
NAC’s financial bylaws mention 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 us. Clause 236 (2) allows us 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. 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. In a situation where the European plane manufacturer was unable to supply us new planes till 2020, the procurement of new passenger jets would have been delayed further if we had followed Clause 236 (1). I think everyone needs to understand why NAC bought the planes. There should not be any confusion regarding the purchase as the process was transparent.
PAC is not satisfied with NAC’s clarification and it formed a sub-committee to investigate the issue. The auditor general’s report has also questioned various aspects of the aircraft deal. What do you think is behind the dissatisfaction of the parliamentary and government bodies?
The report published by the Office of the Auditor General (OAG) has not mentioned that NAC has breached the provisions of the Public Procurement Act in the procurement process. Basically, OAG has expressed its concerns regarding the confusion arisen by the arrangements in the two clauses in our financial bylaws. OAG has asked us why the procurements of new planes were done using Clause 236 (2) instead of Clause 236 (1). The board of directors of NAC decided on buying used planes that have not clocked over 1,000 hours of flight time and the procurement process was started. 10 companies participated in the bidding process where eight quoted for used aircraft and the remaining two offered new planes. After reviewing it, we found the proposal of the AAR Corp to be much beneficial financially than the other proposals. The catalogue price for a new A330 is USD 232 million as mentioned by Airbus. AAR Corp quoted USD 104 million each for two planes which they mentioned could climb up to USD 109 million in inflation adjusted terms after the finalisation of the procurement process. Another bidder quoted a higher price for the same aircraft. I don’t think any system forbids buying a brand new product if it is available at the price of an old one. The specifications and the quality of the aircraft in the proposal submitted by AAR matched our requirements and we accepted it as a profitable proposition.
PAC sought justification from NAC on why the procurement was finalised for a new aircraft instead for planes that have operated for 1,000 hours. How do you justify it?
No matter how new or old an aircraft is, it has to undergo a C-check which costs millions of rupees. There are various tests related to the condition of the aircraft. Our engineers, after several calculations suggested to us to go for an aircraft that has not exceeded 1,000 hours in operation time from the C-check point of view. This was primarily based on technical estimations rather than to favour any supplier. The Clause 236 (2) of forbids us to accept any proposal for procuring aircraft exceeding 1,000 hours of operation. Anything below that was acceptable, so we accepted the proposal for aircraft with zero operation hours. Also, the planes offered by AAR were within our budget; the deal was quite lucrative for us.
The engagement of several companies under a consortium led by AAR Corp has fueled the suspicion of wrongdoings in the procurement process. People are asking why a company called High Fly X which existed only on paper was opened in Dublin, Ireland for the supply of the aircraft. What do you say to this?
Hifly X indeed is a “one Sterling Pound company.” I have clarified on this topic many times. While participating in the bidding process, AAR Crop in its document mentioned that it will establish a special propose company (SPC) in Ireland after being selected as the supplier. Initially, we thought that there was something wrong with the proposal and discussed why AAR chose Ireland for establishing the SPC. 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. During the process, we hired three corporate lawyers who are well versed in the laws of England and Wales. They suggested a go-ahead with the procurement process with the consortium led by AAR Corp. We were aware about the possible controversies if we signed a deal with Hifly X. So after a round of discussions, we requested the representatives of the consortium to ensure us with the guarantee of the deal with the Hifly X. At first, they hesitated to sign the agreement paper mentioning none of their deals in the past were done in such a manner. They replied that the SPC is fully responsible for the deal. Our lawyers somehow added a special provision in the agreement due to which the Hifly X will be partially responsible for the responsibilities in the contract. This made us eligible to hold the three companies - AAR Crop, German Aviation Capital and Hi Fly – responsible in case Hi Fly X breached the procurement agreement. According to the agreement, the consortium is responsible for the maintenance and repair of the aircraft.
The controversy has also highlighted the issue related to ownership of the planes. Are the aircraft leased or procured?
We need to understand that the ownership of the aircraft was decided in Europe not in Nepal because the supplier is a European entity. Hifly X had handed us the ownership in accordance with the legal system of England and Wales. To explain it more clearly, the agreement paper doesn’t have any stamp of the contracting parties on it because the legal system of England and Wales does not require it. Nevertheless, AAR Corp had suggested that we put our stamp on it if required. We did not feeling that the stamp of only one contracting party on the agreement paper would be controversial. We were suggested to release the documents related to the agreement publicly in order to make the deal transparent. Honestly, I didn’t think that it was necessary because the aircraft had already arrived and received the no objection certificate (NOC) from the Civil Aviation Authority of Nepal (CAAN). We have also cleared the customs duty for importing the planes which makes it clear that the ownership of the two wide-body Airbus aircraft belongs to us.
Why is it that planes with a maximum takeoff weight (MTOW) of 230 tonnes arrived in spite of 242 tonnes which was agreed earlier?
MTOW is a highly technical aspect of operating planes which is determined by the manufacturer. In the agreement paper, we left the column of MTOW for AAR Corp to decide.
In fact, the supplier had mentioned that it would be supplying us with aircraft with MTOW of 230 tonnes each which it mistakenly quoted as being 242 tonnes in the proposal it presented to us earlier. I admit that this discrepancy invited the controversy.
To avoid the confusion, we decided to select the planes that will be profitable for us in terms of MTOW. The representatives of AAR Crop and our team of engineers suggested going for 230 tonnes to reduce the operational costs. It is because higher MTOW means an increase in ground handling charges. It is not that a 230 tonne aircraft is inferior compared to a 242 tonne one. The erstwhile is equally suitable for long-haul flights and can fly as far as London from Kathmandu. The rumours about the small fuel tank and less efficient landing gears are not true.
The amount of commission from the supplier to the purchaser of the planes remains at the heart of the current controversy. Is it true that NAC officials received money as commission?
In today’s world no civilian American and European business entities are engaged in corrupt practices. There are stringent anti-corruption laws, rules and regulations in place in their home countries to effectively curtail such acts. Similarly, the rules and regulations related to financial compliance within the companies bar them from bribes. There might have been corrupt practices in NAC while procuring aircraft in the past; but this is not the case at present. All deals have been concluded by maintaining the highest level of transparency.
Another accusation has been that the procurement of two wide-body aircraft went on without preparing a proper business plan. Is this true?
The Nepali aviation sector was already in the Significant Safety Concern (SSC) list of the International Civil Aviation Organization (ICAO) before the start of the procurement process of the two wide-body Airbus aircraft. We were confident that ICAO would remove Nepal from the list by December 2017 and the European Aviation Safety Agency (EASA) would follow suit. The ban was lifted in July 2017; but the aviation body of EU has continued its decision which has been quite distressing for us. We had thought that the wide-body aircraft would connect Nepal with Japan and Korea, this too was hampered by the continuation of EU’s ban. Flight operations require government-to-government agreement. Here, the government of Japan and Korea were not ready to grant us an operation permit unless EASA removed us from the safety list.
Despite that, we have been operating all four aircraft to our regular eight international destinations. There were some technical problems and issues related to occupancy in the initial months. Now many of the issues have been sorted out. Our India bound flights of wide-body planes are operating at full occupancy. The Boeing 757, which we operated for almost 30 years, had a seat capacity of 190, whereas the Airbus A330 has 274. It is not that we are flying with empty seats; in fact we are facing a shortage of seats, particularly in the main tourist season. Also, we have not been able to operate the aircraft satisfactorily due to the shortage of pilots. We need 18 captains to operate the two wide-body aircraft, but only have 11 in our team. We are hiring five more to narrow the gap.
There are fears that NAC might go bankrupt due to its deteriorating financial health after the White Paper was released. Don’t you think the procurement of the two wide body aircraft has been the major contributing factor in this regard?
This is nothing new as NAC has remained in a debt-laden state for a long time. We have taken loans on 10.5 percent interest rate per annum which is lower than the current average interest of 14-15 percent in the country. We have prepared a proper business plan after the financial audit conducted by our two chartered accountants. Similarly, a foreign consulting firm was assigned to evaluate our earlier report. The reports showed we are in a fine position and suggested that we take some additional measures. The projected annual gross income from the two wide-body aircraft is Rs 8 billion, whereas the yearly interest payment is Rs 2.5 billion. Both the Employees Provident Fund and the Citizen Investment Trust evaluated our business plan in detail before approving our loan proposal. There is no chance that NAC will go bankrupt after the latest purchase.
The latest data included in the White Paper was from the first two months of the current fiscal year. The time is considered as the ‘off-season’ when Nepal’s tourism revenue is generally less. Besides, the two wide-body aircraft were not flying according to the plan due to the shortage of pilots. Now we have 11 pilots and the aircraft are in operation for 9-10 hours on a daily basis. An institution is likely to face a cash crunch after investing a major chunk of money in a large project. A similar thing has happened with us; but we are in a comfortable position. We have been paying the installments to our creditors (EPF and CIT) on time. EPF has provided us with an additional loan as it is satisfied with the timely payment.
