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"Let there arise out of you a band of people inviting to all that is good enjoining what is right and forbidding what is wrong; they are the ones to attain felicity".
(surah Al-Imran,ayat-104)
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User Name: SAROSH
Full Name: barkat rizvi
User since: 13/Sep/2007
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Deal is part of international market practices, says PIA

By Rauf Klasra

ISLAMABAD:
President General Pervez Musharraf has received a damning report from the Auditor General of Pakistan that confirms serious doubts and questions about a $479 million PIA deal to buy three Boeing 777 aircraft by the Ahmed Saeed management in 2003.

Contrary to the PIA Board decision that these aircraft be purchased directly from the Boeing company, PIA intriguingly leased them through an 11-day-old company which had only $250 as its assets (not $250 million) and the AGP has not been satisfied with lame explanations given by PIA.

The B777 aircraft, which PIA is now claiming to own, actually belong to Taxila Limited, the Cayman Islands firm, owned by the biggest law company in Cayman Islands with the financing and liquidity coming from Citibank North America (as Paying Agent), Citicorp North America being the Administrative Agent and Citigroup Global Markets Inc. as Placement Agent of the deal.

What General Musharraf may do with the AGP report is not yet clear but opposition political parties who agitated this issue two years ago can now claim some credit as their fears and objections have been confirmed by the Auditor General.

The special audit of this multi-million dollar deal was conducted after the opposition parties, particularly senators of the PPPP, agitated this issue in the Senate of Pakistan. It was also raised in the Senate standing committee on defence. Top PIA bosses, including Defence Minister Rao Sikandar, the secretary defence and others were also summoned in these committee meetings and grilled many times. But the issue gradually faded after top-level changes in the PIA management. The government auditors have now officially recorded their objections to the deal.

According to the audit report, the Board of Directors of PIA in its 266th meeting held on October, 14, 2002 approved the purchase of three new B777-200ER aircraft directly from Boeing Airplane company at a total project cost of $479 million. The Board also authorized and empowered the Managing Director (MD) PIA to negotiate, finalise and sign the agreement and contract of these new aircraft with the Boeing company.But the audit report available with The News shows the PIA entered into a lease agreement on December 15, 2003 with a company called Taxila Limited instead of buying directly from Boeing.

The company was established in the Cayman Islands only 11 days prior to the lease deal on December 4, 2003 with a share capital of only $250 and without any settled assets, the report shows.

PIA had signed a 12-year lease agreement with Taxila Limited under which PIA was required to pay rent in an amount at all times equal to the corresponding payment which was required to be made by Taxila Limited to the Ex Im (Export-Import) Bank of USA. Thus, Taxila Limited was entrusted the ownership of the three aircraft.

The main audit objections raised in the report pertain to Taxila Limited and why PIA used this conduit instead of direct purchase from Boeing. In several meetings with PIA bosses, AGP officials tried to get some straight answers but none could satisfy them. Thus, in their report to the president, AGP has now observed that it is not satisfied with the replies of the PIA management. The main audit objections continue to be:

(i) Transfer of the title of aircraft to PIA will hinge on reassignment of purchase agreement by Taxila Company to PIA after end of term of lease or payment by PIA for which there is no guarantee or guarantor on record that Taxila Limited would automatically transfer it to PIA.

(ii) In case Taxila Limited is wound up before expiry of the 12-year term, it would have an adverse impact on the process of transfer of ownership to PIA.

(iii) Besides, PIA has not dilated on the comparative advantage between direct purchase agreement with Boeing company and through special purpose vehicle namely Taxila Limited. PIA had not justified the selection of Taxila Limited in comparison to other leasing companies such as ILFC, GECAS, CIT Group and Boeing Capital Corporation.

During closed-door meetings between PIA and audit teams, PIA officials were of the view that as per terms of the financing structure, the purchase agreement between Boeing company and PIA was assigned by PIA to Taxila Limited and the purchase agreement dated December 15, 2003 specifically states that the purchase agreement will be reassigned by Taxila Limited to PIA upon release of the lien of the security documents once the EX Im Bank guaranteed facility was repaid by PIA.

PIA also took the line in these meetings with the audit that Taxila Limited was not only a conduit and the actual payment obligations were that of PIA and all recourse under this financing arrangement was to PIA as the principal obligator.

But, the auditors who scrutinized the whole deal and subsequently met PIA officials were not satisfied with the version and justifications given by the PIA management. The auditors observed that the transfer of the title of aircraft to PIA would hinge on the will of Taxila Limited and there was no guarantee or guarantor on record that Taxila Limited would automatically transfer it to PIA.

PIA was also asked by The News to provide its own version after the AGP report. A spokesman E-mailed the following response:

“In International Finance Market loaning facility from Banks of International repute is available through the Financial Instrument of Special Purpose Companies (SPCs). Taxila Limited is one of the SPCs available in International Finance Market. Its expertise and Financial Instrument facility was used during 2003 for making available special loan from EX-IM Bank Limited leading to purchase of three Boeing 777 aircraft.

“SPCs normally takeover the financial ownership of the aircraft so purchased by any country on behalf of the loaning Bank, and finally its ownership is transferred back to the beneficiary airline – herein PIAC – once the loan is repaid.

“International Finance market practices subscribe to such finance raising modalities for entering into mega buying like aircraft. There is nothing wrong in it and it is part of international market practices.”

The PIA response again avoids the questions and issues raised in the AGP report and does not explain what guarantees have been obtained from Taxila Limited to get the aircraft back after 12-years, if Taxila Limited survives that long.

Source: The News
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