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AGP opposes Rs15 billion loan to PIA without approval | The Express Tribune



Pakistan’s Auditor General has recommended holding individuals responsible for paying Rs15 billion to Pakistan International Airlines in the last financial year without first obtaining a business plan or government approval for the release of funds . Federal auditors raised an objection against the Finance Ministry during their review of the accounts for the 2022-23 financial year, which ended in June of the previous year.

The audit objection highlights the ad hoc approach adopted by successive governments, including the interim setup, to address the profound financial challenges faced by Pakistan’s third largest loss-making public sector entity in 2022.

The Auditor General of Pakistan (AGP) department has raised objection over payment of Rs 15 billion interest on loans on behalf of PIA without a thorough analysis of borrowings and business plans for the financial year 2022-23.

Since 2018, the Finance Ministry has been making such payments, and if the audit extends to previous years, the total could approach nearly Rs100 billion. The decision to cover PIA’s interest costs was taken in December 2017 by the then government. However, the Ministry of Finance subsequently failed to obtain any approval from the federal cabinet.

According to the audit’s objection, “paying the surcharge without analyzing PIA’s borrowings and business plan represents a serious management error.”

The audit recommends holding individuals accountable for providing grants without obtaining a business plan or formal government approval.

Auditors observed that the Finance Ministry was paying interest on PIA’s loans without examining the amount borrowed or the purpose for which the funds were acquired from various banks. Additionally, the Ministry of Finance neglected to analyze loan agreements and other financial documents with banks.

Further, the objections revealed that “no business plan for Pakistan International Airlines Corporation Limited (PIACL) has been approved even after five years”.

Despite strong support from the Special Investment Facilitation Council (SIFC), the caretaker government has failed to bring about any improvement in the affairs of PIA. The Ministry of Privatization had assured the ITFC of privatizing PIA before the end of January.

The Privatization Ministry also presented a partial plan to restructure PIA’s debt, which the International Monetary Fund (IMF) did not approve last month. The IMF requested full details instead of focusing only on the restructuring of commercial banks.

Federal auditors pointed out that before getting the annual grants of 15 billion rupees, PIA did not provide “details on expenditure reduction” to the Finance Ministry.

Read Cabinet approves restructuring of PIA

However, Finance Ministry officials believed that spending control was not within their purview. They said monitoring expenditure was the responsibility of the PIA board and the aviation ministry.

Responding to the AGP, the Finance Ministry said the Cabinet Economic Coordination Committee had rectified a decision in April 2023 to increase the sovereign guarantee limit to Rs263 billion for PIA. However, the AGP did not accept this response.

The Finance Ministry claimed to have rigorously negotiated every loan facility obtained by PIA from banks. He said the cost of PIA borrowings was only 1.45 per cent higher than the prevailing interbank offered rates in Karachi (Kibor).

According to the September 2023 financial advisors’ report, PIA’s equity had turned negative by Rs663 billion. Last month, the federal cabinet approved inviting potential investors to buy 51 to 100 percent of PIA’s shares.

The Finance Ministry opposed the transfer of the Rs622 billion debt to the holding company and instead recommended keeping part of it within the main PIA.

Financial advisers have suggested transferring PIA’s liabilities of Rs 622 billion from September 2023 to the new holding company, along with its assets. These transferable liabilities include Rs268 billion of commercial bank debt as of September 2023.

The prevailing sentiment is that having the federal government take over the debt of commercial banks will not solve the problems, underscoring the need to directly link any debt settlement to privatization proceeds.

In order to accelerate the privatization of PIA, the caretaker government hired a financial advisor for a substantial fee without adhering to the international competitive bidding process. Last month, the Privatization Commission’s budget was increased by 175%, or Rs2.2 billion, to compensate Ernst & Young, PIA’s financial advisor.

This significant budget increase allocates the majority of payments of $14.53 million, or Rs4.3 billion, to financial advisors responsible for the privatization of PIA and the restructuring of the Roosevelt Hotel in New York.
PIA’s financial advisor is expected to receive a total of $6.9 million or Rs2 billion, of which 95% or Rs1.9 billion will be disbursed in the current financial year.

Similarly, the financial advisor of the Roosevelt Hotel will receive a whopping sum of $7.65 million, or Rs 2.2 billion, of which 60 per cent will be allocated for the current financial year. These payments represent some of the highest remuneration amounts awarded to financial advisors engaged by the Privatization Commission.

Published in The Express Tribune, March 3rd2024.

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