CAG exposes govt's financial faults

Risky aircraft buys did nothing for mkt share.

The Comptroller and Auditor General (CAG) has pulled up the government for “risky” acquisitions of a large number of aircraft for Rs 46,000 crore, funded almost entirely through debt, and creating no cost benchmarks before negotiating with manufacturers.

It has raised questions over Air India’s “flawed” assumption that buying 50 long-range aircraft to increase capacity would automatically increase its market share. The auditor has also pointed a finger at the speed at which decisions were taken in acquiring new aircraft. It has observed the aircraft acquisition programme under consideration from 1996 suddenly picked up steam and a contract for new aircraft was signed in seven months.

The CAG has questioned the government’s liberalised policy of giving out bilaterals to foreign carriers and the botched merger between Indian Airlines and Air India.

The report, tabled in Parliament on Thursday, said the original proposal for acquisition of 28 aircraft took its own time for processing. However, the civil aviation ministry asked the airline in August 2004 to revisit its proposal. Between August 2004 and December 2005, the proposals were formulated by Air India, approved by its board, examined and approved by the ministry, the Planning Commission, department of expenditure, empowered group of ministers and Committee on Economic Affairs. The government conveyed its approval on December 30 and the contract was signed by Air India with Boeing on the same day. “Clearly, there was a massive inflation of aircraft requirement between January 2004 and August 2004, which is inexplicable, considering that such a dramatic shift in market requirements could not have reasonably occurred in such a short time” said the report.

It was also assumed that more aircraft were ordered on the assumption the increase would lead to an increase in Air India’s market share. But, “the projected increase in market share from 19 to 30 per cent by 2012-13 was not adequately validated,” it said.

The audit report said while the airline’s acquisition plans were revised upwards, its chances of increasing market share were hampered by liberal bilateral entitlements. “Whatever chances Air India had of increasing market share through increased capacity share were severely hampered by the civil aviation ministry’s decision to liberalise bilateral entitlements from 2005 onwards. This benefited airlines/countries with a huge proportion of sixth freedom (allowing an airline to book passengers from one country via the base country of the airline for a third country) traffic and gave inadequate lead time to Air India (after delivery of the aircraft) to gear itself up for competition,” said the report.

The report said the financial case for a merger was not validated prior to it. “In our view, the focus of the process leading up to the implementation of the merger was on consideration of alternative options for a merger, stamp duty and tax implications, creation of top-level posts for accommodating existing incumbents, etc.

However, the financial case for a merger was not adequately validated prior to the merger,” it said.

On the acquisition of 43 aircraft by the erstwhile Indian Airlines, CAG has said if the civil aviation ministry was indeed keen on a full-scale aircraft acquisition in national interest, “it should have acknowledged that such an acquisition would involve substantially negative cash flows... and approved appropriate arrangement for funding the resultant cash deficit”. 

CAG has recommended the government give autonomy to Air India with regard to commercial and operational decisions and get strict on bilaterals.

“It is imperative Air India is headed by a professional, who has a stake in the success of the airline,” it said.

The report suggested the government freeze bilaterals to countries predominantly using sixth freedom rights, such as Emirates. It has suggested ways in which Air India could improve revenues and cut costs.