REFERENCE / COMPLAINT NO. XXI

Reference dated 7-6-2004 – Irregularities in Purchase of Boeing 777 Aircrafts - PIA

To: The Chairman
National Accountability Bureau
President’s Secretariat
Islamabad.

Pakistan Peoples Party .....COMPLAINANT

V/s

General (Retd) Hamid Nawaz, Secretary Defence, Government of Pakistan

Ch. Ahmad Saeed, Managing Director, Pakistan International Airlines Corporation

Air Vice Marshal (Retd) Niaz Hussain, Deputy Managing Director PIAC and Others
----RESPONDENTS



Subject : Complaint under section 5 and 18 (b) sub section – ii of the NAtional ACCOUNTABILITY BUREAU (NAB) ORDINANCE 1999 against the holders of public office for punishment under Section 10 of NAB Ordinance for causing huge finanacial loss to the national exchequer by corruption and corrupt practices

The respondents in this complaint fall within the ambit holder of public office as defined in Section 5 of the NAB Ordinance and are liable for punishment by he court of competent jurisdiction under the NAB Ordinance.

The respondents are reportedly guilty of corruption and corrupt practices as defined in Section 9 of the Ordinance and as such are subject to punishment under Section 10 of the Ordinance based upon the following facts and grounds:

Facts and Grounds:
South Asia Tribune (http://www.satribune.com/archives/apr25_may1/P1_pia.htm) reveals that top bosses of PIA Pakistan National carrier are totally making false misleading claims about PIA deals particularly recent purchasing of B–777 aircrafts from US. The Company’s document finds mention that the Chairman and others Executives repeatedly claim that PIA has not purchased any aircrafts. And now the Parliamentary Secretary for Defence in the National Assembly on the floor of the House categorically stated that PIA owns B-777 aircrafts. Whereas factually Texila limited, Cayman Islands Firms which was set up on 4 December 2003 just 11 days before the signing of the deal with PIA has only one shareholder who has invested just only one dollar to become its owner, whereas the entire shares of capital of Taxila Ltd is Dollar 250 divided into 250 shares of one dollar each and the only share holder Maples and Calder Inc the law firm based in Cayman Islands has singed all the agreements to lease the B-777 Aircraft to PIA. Thus PIA has leased the three aircraft through a “Master Leased Agreement” with Taxila Ltd for 12 years which also negates the claim of purchase of B-777 aircraft. Apparently there is contradiction whether B-777 aircraft have been purchased or leased by PIA which needs investigation in the better interest of the country.

Respondent No. 3 was originally appointed as Director PIA and was promoted as Deputy Managing Director who also enjoy the status of Direction Engineering, Director Finance, Director Stores and Director Procurement at once who in one go raises demands, select the goods decides the price, places the order and makes its payment and deal is done. The latest audit report for 2003 issued by Yousaf Adil Saleem and Co. and Taseer Hadi Khalid & Co. Chartered Accountants issued on 25 March 2004, sent to PIA Boards of Director reveals, apparently PIA has total inventory of spares and commercial stores valued at over rupees 10 billion about US $ 175 million which in access of the consumption and high amount was spent for procurement for the aircraft that are expected to be retired in the next few years.

The aforementioned facts apparently show that the respondents have intentionally and deliberately caused huge losses to the national exchequer and have also made contradictory statements regarding the purchase and lease of the air crafts and thus have committed offence of corruption and corrupt practices and liable to punish under the NAB Ordinance 1999.

Conclusion:
Based on the above facts and grounds respondents have shown willful indulgence in corrupt practices under Section 9 of the Ordinance. Such persons are subject to punishment under Section 10 of the Ordinance.

As such the Chairman of the NAB is called upon to initiate investigation in connection with the matters set out herein above and further proceed to file a reference against respondents for violating the provisions of Section 9 of the Ordinance punishable under Section 10 of the Ordinance in competent court of law and proceed against those concerned for violating Section 9 of the Ordinance.

Complainant
Pakistan Peoples Party

Through:
Shah Khawar Advocate
Islamabad Dated : 7-6-2004

The Reference / Complaint is based on the source incorporated as under :

How Top Bosses are Bilking PIA, Under Official Supervision
Issue No 90, May 2-8, 2004 | ISSN:1684-2057 | satribune.com
By M A Siddiqui

KARACHI: PIA Chairman Choudhry Ahmed Saeed is passing the buck of leasing the Boeing 777 aircraft and its associated scandals to the ex-chairman, General Hamid Nawaz, who is also the Federal Secretary for Defence.

According to PIA sources, Saeed is under a lot of pressure as the independent media and the Opposition members of the National Assembly have started asking a lot of questions about the B-777 deals but the latest explanation Saeed has given to his colleagues and political bosses is that the deal was signed by General Nawaz and not him.

“I am not responsible for the deal and if anything is not right, ask General Hamid Nawaz,” Saeed has been telling Islamabad. When the deals were signed, Saeed was the Managing Director of PIA.

While it is technically true that the B-777 deals were signed during the chairmanship of a General of the Pakistan Army, the current Chairman is extracting the real juice from the deals.

Analysts are aghast at the weird corporate structure erected by Chairman Saeed which eliminates all checks and balances and gives unprecedented authority to his trusted cronies, especially in those areas where huge spending and buying is involved.

The most glaring example is of a favorite Director-turned Deputy Managing Director, who is practically the chief Procurement Officer, who places the orders for purchases, and as Director Finance himself releases the payments. He also keeps the procured goods under his watch.

This lucky man is Air Vice Marshal (Retd) Niaz Hussain, a man sent to PIA by the group of close friends of General Musharraf including his aide Tariq Aziz and Bridge buddy Brig (Retd) Niaz. The favored AVM was first inducted as Director Engineering, despite objections by the Civil Aviation Authority, then given the additional portfolios and then promoted as Deputy MD.

AVM Niaz is enjoying the status of Director Engineering, Director Finance, Director Stores and Procurement, all at once. In one go he raises a demand, selects the goods, decides the price, places the order and makes the payment. The deal is done. Chairman Saeed has refused to fill these posts now being held by this one man. There is no explanation why a Deputy MD has to perform all these tasks at the same time.

The result is millions of dollars of extra purchases by the PIA, as revealed by the latest Audit Report for 2003, issued by Yousuf Adil Saleem & Co and Taseer Hadi Khalid & Co, Chartered Accounts.

According to their report, dated March 25, 2004, sent to the PIA Board of Directors, PIA has a total inventory of spares and commercial stores valued at over Rs 10 billion (about US$175 million).

The entire Audit Report is now available here. Click to View the Report. Financial and Corporate experts are requested to review this report and send us their expert observations about irregularities and major jugglery of figures/accounting tricks resorted to by the PIA management. The other PIA documents will also be posted soon as they are over 60 MB in size.

“Our review of consumable stores and spares and commercial stores also revealed that actual consumption from the inventory has been insignificant as procurement has mostly exceeded the consumption,” the Auditors noted in para 10.6 of their report.

They also noted an “unusually high amount of procurement during the year for some of the aircraft that are expected to be retired in the next few years.”

The auditors become more specific in para 13.1 titled 'Segregation of Duties'. “In our previous year’s management letter we mentioned that as a result of the reorganization, management of stores and spares, including their custody, procurement and physical inspection have been given to Director Engineering,” the Audit Report stated.

And it added: “We consider that procurement and custody of stores and spares should not be under the executive who is responsible for consumption…We consider it as a serious weakness in the system…”

This Director Engineering is the same AVM Niaz Hussain who is also Deputy Managing Director, Director Stores, Procurement, Finance and Purchases --- the key handler of all matters juicy and lucrative. To make matters easy, the post of Director Stores and Procurement has been abolished by the Chairman, just in case someone gets ideas and wants to induct his own person. No major airlines in the world run without procurement and purchase directorates.

The auditors have raised scores of other objections to the systems prevalent in PIA. But the management is not ready to listen as the top management believes until General Pervez Musharraf and his close friends are in power, PIA will remain out of bounds for anyone in the National Accountability Bureau.

Aviation experts say in the price of a complete aircraft, like the B-777, the shell of the plane costs 55 per cent of the total while the rest 45 per cent is spent on interior equipment like seats, galleys, trolleys, video systems, carpets etc. It is these items which provide the maximum room for buyers to make big bucks, under the table.

In the B-777 deals, while the ex-Chairman General Hamid Nawaz signed the overall deal for the aircraft, all the rest of the equipment, or 45 per cent of the aircraft, purchases have been made by the present Chairman and his hand picked Directors, including AVM Niaz Hussain.

Probably because of the lucrative nature of these purchases, Chairman Saeed is aggressively pushing for refurbishment of all old planes, including Airbus 310 in which his men are trying to replace the expensive seats and TV monitors. This is where the cream is, they believe.

http://www.satribune.com/archives/apr25_may1_04/P1_pia.htm

The text is as follows:

Citibank controls all financial matters: Planes Leased
Secret Documents Reveal PIA Owns No B-777 Aircraft

By MA Siddiqui & Shaheen Sehbai

KARACHI/WASHINGTON: Top bosses of PIA, Pakistan's national carrier, are in a thick hot soup as more than 100 pages of top secret company documents, containing explosive information about recent PIA aircraft deals with Boeing and Citibank, have been leaked to the media by frustrated officials.

A set of these 118 pages, received by the South Asia Tribune, proves these politically appointed PIA executives have been making an utter fool of the ruling military Generals and the Pakistani people at large by making totally false and misleading claims about PIA deals, specially the recent "purchases" of Boeing 777 aircraft from US.

PIA has not purchased any aircraft, as repeatedly claimed by PIA Chairman and other executives, these documents reveal. Pakistan has actually paid US$ 150 million as 15 per cent of the down payment so that a One-Dollar company in Cayman Islands could own these aircrafts on behalf of the Citibank.

The B-777 aircraft, which PIA is now claiming to own, actually belong to Taxila Limited, a 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.

Taxila Limited, set up on December 4, 2003, just 11 days before the signing of the deal, has only one shareholder who has invested just one US dollar to become its owner. The entire share capital of Taxila Limited is $250 divided into 250 shares of one dollar each and the only shareholder is Maples and Calder Inc, the law firm based in Cayman Islands. Click to View Memorandum of Association Page1 | Page2

PIA has signed all agreements to lease the B-777 aircraft with this one-dollar firm. Click to View Intercreditor Agreement Page1 | Signature Page

"Basically Citibank controls all the corporate and financial strings. The footprints of Finance Minister Shaukat Aziz, now on leave from Citibank, are visible all over the deal," a former World Bank official who saw the PIA documents observed in Washington.

In effect, so far PIA has leased the three B-777 aircraft through a "Master Lease Agreement" with Taxila Limited for 12 years. The text of Master Lease Document has not yet been leaked to the media but it holds the answers to many key questions which now arise after all the wrong claims and misstatements made by the PIA bosses about the 777 deals.

Why has PIA been claiming that it has purchased the B-777 aircraft is an important question but the vital part of it is at what price the aircraft have been leased from Taxila Limited.

No resolution adopted by the PIA Board has authorized PIA to purchase the aircraft. The latest resolution circulated by PIAC Secretary Ghazanfar Mashkoor on December 9, 2003, authorizes and empowers PIAC "for the acquisition of 3 Boeing 777-200 ER Aircraft. Its clause (b) (ii) authorizes and empowers PIAC to sign a Master Lease Agreement with Taxila Limited. It nowhere mentions any purchase. Click to View Resolution

PIA Chairman Choudhry Ahmed Saeed has been blowing his trumpet worldwide that PIA had obtained a very favorable deal in buying the aircraft but it now becomes clear that PIA has not purchased anything. "If the deal was good, the buyer, which is Taxila Limited, has got the benefit and it is yet to be seen at what profit-added rate the same aircraft has been leased to PIA," a financial expert said.

The expert was asked to comment on whether there was any possibility of kickbacks and wrongdoing in the B-777 deal in view of the availability of the documents. According to his view the sale of the aircraft to Taxila Limited by Boeing was transparent and above board as US companies cannot offer any under the table kickbacks.

But the deal between Taxila and PIA could include anything as that was not covered by US laws and PIA could have agreed to pay any amount as lease to Taxila, which in turn could recycle some of it to anyone agreed upon, the expert added. This will only become clear when PIA releases the Master Lease Agreement with Taxila and when the document and rates are compared with the original sale price by Boeing.

PIA Chairman has claimed many a time that he paid $105 per piece for buying each B-777. But already the documents reveal that EXIM Bank of USA had issued a guarantee of $351.3 million for the first three B-777. The net contract price for the 3 B777-200ER is: $422,410,685. So each of the three aircraft will cost $140,803,561. Exim's Guarantee Amount is (85% of net-net prices) or $351,313,900. Click to View EXIM Letter Page1 | Page2

The documents available with South Asia Tribune include a 34-Page Intercreditors Agreement between PIA, Taxila Limited, Citibank and other companies providing financial and corporate support.

Other leaked documents include a 23-Page PIA Guarantee between all these parties signed on December 15, 2003, 10 pages of PIA Board of Directors resolutions giving the go-ahead of the deal, , a 25-Page Guarantee issued by the Export-Import (EXIM) Bank of USA on February 20, 2003, a 15-Page Participation Agreement between Taxila Limited, Citibank et al as one party and EXIM Bank as the other, the Incorporation Certificate and Memorandum of Association of Taxila Limited filed in Cayman Islands, a State Bank Letter, and a 3-Page letter by Boeing written to PIA.

Surprisingly even members of the PIA Board of Directors were not informed about the details of the deal and they had no clue about Taxila Limited, the offshore company owned by Maples and Calder which owns the
B-777 aircraft, until February 26, 2004 when the PIA Board met for its 276th meeting, even after the first plane had been delivered. All the resolutions of the Board were approved by the management through a system of "Circulation" which is another way of avoiding any serious discussion about the agenda.

The confidential notice of the 276th PIA Board of Directors meeting on February 26, 2004, issued by PIAC Secretary, Ghazanfar Mashkoor, on Feb 17, stated clearly that "some Board members, whilst signing the aforementioned Resolution had desired for a briefing on Taxila Limited as Lessor in the Participation Agreement, Master Lease Agreement and Intercreditor Agreement.." Click to View Letter

The most striking revelation has been made by the Boeing Company itself, admitting that the B-777 delivered to PIA earlier this year was not up to the required specifications and PIA had expressed concerns about the quality.

In a letter addressed to General Manager, Fleet Planning of PIA, on February 13, 2004, Boeing's Attorney-in-Fact, who signed the letter, admitted that the first B-777 delivered to PIA earlier this year "does not meet the configuration requirements of the reference Detail Specification or with which PIA has expressed concern regarding the quality of the Aircraft."

"Resolution of such conditions will be accomplished by Boeing as described in the Attachment," the letter said but forbade PIA from making the Attachment public as "Boeing considers the commitments to PIA described in the Attachment to be privileged and confidential information." But Boeing promised in the letter to meet its commitments and provide parts, service and labor free of charge. Click to View Boeing Letter Page1 | Page2 | Page3

South Asia Tribune will place the entire 118 pages on its web site next week after obtaining the point of view of PIA and other parties on the contents and meanings of these documents.