AGP objects to Rs15b lent to PIA without approval

The Auditor General for Pakistan has recommended holding individuals accountable for disbursing Rs15 billion to Pakistan International Airlines in the last fiscal year without first obtaining a business plan or government approvals for the fund release. Federal auditors have raised an audit objection against the Ministry of Finance during their examination of accounts for the fiscal year 2022-23, concluding in June of the previous year.

The audit objection highlights the ad-hoc approach taken by successive governments, including the caretaker setup, in tackling the deep-seated financial challenges encountered by Pakistan’s third-largest public sector loss-making entity in 2022. 

The Auditor General for Pakistan (AGP) department has raised the objection regarding the payment of Rs15 billion in interest on loans on behalf of PIA without a thorough analysis of borrowing and business plans for the fiscal 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 made in December 2017 by the then government. However, the finance ministry failed to obtain any approval from the federal cabinet subsequently.

According to the audit objection, “The payment of markup without an analysis of PIA’s borrowings and business plan represents a serious lapse in management.”

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

The auditors observed that the finance ministry paid interest on PIA’s borrowings without scrutinising the borrowed amount or the purpose for which the funds were acquired from various banks. Additionally, the finance ministry neglected to analyse the borrowing agreements and other financial documents with the banks.

Furthermore, the objections revealed that “no business plans for Pakistan International Airlines Corporation Limited (PIACL) were approved even after five years had passed”.

Despite significant support from the Special Investment Facilitation Council (SIFC), the interim government failed to bring about any improvements in PIA’s affairs. The privatisation ministry had assured the SIFC of privatising PIA before the end of January.

The privatisation ministry also presented a partial plan for the debt restructuring of PIA, which the International Monetary Fund (IMF) did not endorse last month. The IMF requested comprehensive details instead of solely focusing on the restructuring of commercial banks.

The federal auditors highlighted that before securing the Rs15 billion annual grants, PIA did not furnish “expenditure reduction details” to the finance ministry.

Read Cabinet okays PIA restructuring

However, finance ministry officials were of the view that auditing expenses was not within their purview. They stated that scrutinising expenses fell under the responsibility of the PIA board and the aviation ministry.

In response to the AGP, the finance ministry stated that the Economic Coordination Committee of the cabinet rectified a decision in April 2023 to increase the sovereign guarantees’ limit to Rs263 billion for PIA. However, the AGP did not accept this response.

The finance ministry asserted that it rigorously negotiated every loan facility obtained by PIA from banks. It said that the cost of PIA borrowings was only 1.45% higher than the prevailing Karachi Interbank Offered Rates (Kibor).

According to the financial advisors’ report as of September 2023, PIA’s equity had turned negative by Rs663 billion. Last month, the federal cabinet endorsed inviting interest from potential investors to purchase 51% to 100% of PIA’s shares.

The Ministry of Finance opposed transferring the Rs622 billion debt to the holding company and instead recommended retaining some portion of it within the core PIA.

Financial advisors have suggested transferring PIA’s liabilities of Rs622 billion as of September 2023 to the new holding company, along with its assets. These transferable liabilities include Rs268 billion in commercial bank debt as of September 2023.

There is a prevailing sentiment that the federal government picking up the commercial banks’ debt would not resolve the issues, stressing the necessity to directly tie any debt settlement with the proceeds from privatisation.

In order to expedite the privatisation of PIA, the interim government has engaged a financial advisor at a substantial fee without adhering to the international competitive bidding process. Last month, the Privatisation Commission’s budget was increased by 175%, or Rs2.2 billion, to compensate Ernst & Young, the financial advisor for PIA.

This significant budget increase allocates the majority of the $14.53 million or Rs4.3 billion payments to the financial advisors tasked with the privatisation of PIA and the restructuring of the Roosevelt Hotel in New York.
The financial advisor for PIA is set to receive a total of $6.9 million or Rs2 billion, with 95% or Rs1.9 billion disbursed during the current fiscal year.

Likewise, the financial advisor for the Roosevelt Hotel will receive a staggering $7.65 million or Rs2.2 billion, with 60% of this payment allocated for the current fiscal year. These payments represent some of the highest compensation amounts granted to financial advisors contracted by the Privatisation Commission.

Published in The Express Tribune, March 3^rd, 2024.

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