43-plane Airbus deal: IA could have saved $1 bn, says CAG
In its report that is likely to be placed in Parliament in the current session, the auditor has recommended future aircraft acquisition through auctions "on the line of auction of 3G spectrum for telecom operators".
It also said acquisitions should be linked to "reasonable debt-equity ratio so that borrowings are kept within limits". Indian Airlines had a paid-up capital of Rs. 107 crore and reserves of almost Rs. 566 crore as on March 31, 2005. While the CAG states that the cost of acquisition was Rs. 8,527.19 crore, the government had put it at Rs. 9,890 crore.
The CAG's final report lists what it calls several anomalies.
The aircraft purchase deal negotiated by the P Chidambaram-chaired EGoM, and subsequently cleared by the Cabinet Committee on Economic Affairs, required Airbus to set up a $75-million Pilot Training Centre and a $100-million Maintenance, Repair and Overhaul (MRO) facility. But the airline did not put these riders in its agreement with the French aircraft manufacturer, the CAG pointed out.
"As such, the negotiated terms are not enforceable," the CAG said.
43-plane Airbus deal: IA could have saved $1 bn, says CAG
Five years later, an MRO facility is yet to take off, with Airbus having refused to honour the commitment given to the EGoM, citing that the company is not in the business of training or MRO. When contacted, a former senior airline executive said these two clauses were included in a "letter of understanding" signed separately, but which is not legally binding.
The Rs. 8,527.19-crore deal to buy 43 planes was signed by the then CMD of Indian Airlines Vishwapati Trivedi with then Airbus Senior Vice President Kiran Rao, in the presence of Prime Minister Manmohan Singh and the French President Jacques Chirac in February 2006.
The CAG has blamed Indian Airlines for not availing of yet another concession in its agreement with Airbus that is likely to cost it Rs. 2,774.45 crore in form of additional interest burden.
The deal allowed the airline to take advantage of a "back stop financing" arrangement for purchase of 21 of the 43 aircraft. It said if Indian Airlines could not get cheaper loans, then Airbus would fund this acquisition by charging only Libor plus 225-265 basis points.
"IAL (erstwhile Indian Airlines Limited) instead of seeking this back stop financing, availed the loan from IDBI at a higher rate," said CAG. The auditor has calculated a loss Rs. 314.66 crore till March 2010, and Rs. 2,459.79 crore in future.
43-plane Airbus deal: IA could have saved $1 bn, says CAG
When Indian Airlines moved the proposal to acquire additional aircraft, it said the fleet would expand from 53 to 73. But its fleet size stood at 107 by the time all 43 new Airbus places were acquired till April 2010.
The CAG said that the airline extended lease period of 28 planes even after placing orders, incurring 'avoidable' expenditure of Rs. 1,694.14 crore, a portion of which is payable in the future. It has asked the company to return leased planes as per its original proposal to save on rentals.
The CAG also found the contract terms related to escalation payment "defective" as it led the airline to pay more for aircraft that were delivered the first. The cost of aircraft delivered later is higher due to a rise in input costs over the delivery schedule. "Airbus had agreed to charge a flat 3 per cent escalation cost on aircraft to be delivered over the next four years," said an official in the know. CAG pegged the loss on this account at Rs. 199.48 crore.
Source: Indian Express