PIA restructuring plan blocked

ISLAMABAD: Secretary Cabinet, Sardar Ahmad Nawaz Sukhera has reportedly blocked PIA's restructuring plan prepared by the Prime Minister’s Advisor on Institutional Reforms and Austerity (IR&A), Dr Ishrat Hussain, arguing that it would not be in accordance with Rules of Business, 1973 to take any decision, especially when it entails large sums of public money on a presentation.

Official sources told Business Recorder that Dr Ishrat Hussain recommended that the Cabinet may agree to the conversion of PIA liabilities amounting to Rs.457.1 billion into equity which would be parked in a Special Purpose Vehicle (SPV) Company. The Secretary Finance has apprehended that under the proposed plan, GoP loans of PIACL would be converted into equity which would make cash outflow of PIACL zero. On the basis of improved balance sheet, PIACL may obtain further loans which may again put a burden on the national exchequer. Therefore, it would be appropriate to put a cap on taking further loans by the PIACL. PPRA has also stated that it was not in favour of exemption from PPRA rules sought in the recommendations.

Sharing the details, the sources said, on April 27, 2021, Dr Ishrat Hussain made a presentation to the Cabinet on PIA's restructuring plan. The following are salient points of his presentation: (i) negative equity - Rs 460 billion; (ii) CAA and PSO loans - Rs 118 billion; (iii) government loans - Rs 326 billion; and (iv) losses incurred - Rs 405 billion.

Of Rs 405 billion losses, Rs 55,5 billion was incurred in 2019, Rs 67.3 billion in 2018, Rs 51 billion in 2017, Rs 44.9 billion in 2016, Rs 32.5 billion in 2015, Rs 31.7 billion in 2014, Rs 44.3 billion in 2013, Rs 30.6 billion in 2012, Rs 26.8 billion in 2011 and Rs 20.8 billion in 2010,

Rs 185.5 billion was operating loss, Rs 47.5 billion exchange loss, Rs 155.5 billion finance cost and Rs 16.8 billion taxes.

PIA's organisational issues were frequent changes in management, political influence, lack of accountability, non-profitable routes, overstaffing (aircraft to-HR ratio is 450 and fake degrees).

External issues faced by PIA were too many slots to foreign airlines, compliance and regulatory issues, IATA ban and Covid-19.

The cabinet was informed that there is need for organizational restructuring of PIA and balance-sheet restructuring.

PIA is bearing the burden of overstaffing of 14,000-srong workforce with the highest aircraft-to-HR ratio and non-core functions, i.e., catering, courier service and losses. For human resource restructuring, Voluntary Separation Scheme (VSS) was launched and reduced employees by 25 percent. Economic Coordination Committee (ECC) of the cabinet approved Rs 12.87 billion support by the GoP due to which annual saving of Rs 4.2 billion in salary is envisaged.

The cabinet was informed that with outsourcing functions, 400 employees can be reduced in addition to reduction of 633 employees in food services, 628 in technical ground support, 1967 in base maintenance engineering, 429 in precision engineering complex and 320 in Speedex Courier.

It was also argued that if Supreme Court removes ban on hiring, PIA would recruit qualified personnel to successfully run restructured PIA operations.

The cabinet was briefed that existing fleet consists of old and narrow body aircrafts - B777, A 320 and ATR - that are not fuel efficient. It was suggested that existing fleet be replaced with new, fuel efficient aircraft. With this fuel cost savings of Rs 15-20 million per annum, maintenance cost savings of Rs 200 million per annum would be realized.

For network optimization and expansion, it has been proposed to pursue aggressive network optimization and expansion initiatives through code sharing arrangements made with Turkish Airlines, Thai Airways, Etihad and Pegasus Airline. Arrangements to be extended to wider networks where PIA does not operate; seat factor is expected to increase to approx. 82% by 2023, compared to current 75% and agreements in the UK and Spain with local train and bus operators to accommodate passengers from areas where PIA does not operate and such operations to be expanded to more operators.

For route rationalization, the following proposals have been considered: (i) eliminate loss-making routes; (ii) focus on profitable routes and target ethnic Pakistani travellers; and (iii) as a result, new profitable routes have been started, loss-making routes were discontinued and additional frequencies on profitable routes have been mounted.

The cabinet was further briefed that PIA's balance-sheet restructuring proposal has been prepared in consultation with President National Bank of Pakistan, President Bank Alfatah, President Bank of Punjab. The proposal was put forward to Financial Restructuring Committee headed by Finance Secretary, which held seven meetings attended by the Secretary Aviation.

It was stated that the Government of Pakistan would assume financial liabilities of Rs. 457.1 billion, which will enable PIA to mobilize capital from financial market on improved balance sheet.

The Advisor IR&A presented the following recommendations: (i) initial assessment of the IATA Consultancy endorses the findings of this Restructuring Plan, that "there can be no strengthening of PIA's balance-sheet or reduction to permanent losses without significant assistance with cleaning up the Balance Sheet. The GoP must play an instrumental role in directly helping and facilitating some of the measures and PIA must reform its Corporate Structure and Business Model;” (ii) IATA Consultancy agrees with the main proposal of PIA Restructuring Plan that until PIA is able to fundamentally reform itself, made possible through a de-leveraged balance sheet, it will be difficult to attract such third-party equity participation; (iii) Finance Minister has advised that while the consultants are preparing the Corporate Business Plan of PIA, the government should explore the possibility of interest of domestic and international business groups to enter into management contract to operate PIA once the balance sheet is restructured as proposed and the Corporate Business Plan is approved by the government; (iv) in light of the developments, Advisor on IR&A recommended that the Cabinet may agree to the conversion of PIA liabilities amounting to Rs 457.1 billion into equity which would be parked in a Special Purpose Vehicle (SPV) Company. Finance Division would liquidate the direct government loans and guaranteed loans over next six years in accordance with the amortization schedule. PIA would follow the financial restructuring plan according to the timelines agreed with the Board; and (v) no further loans or guarantees would be furnished by the GoP to PIA once this restructuring plan becomes effective.

During a discussion, the Finance Minister unequivocally stated that the Federal Government taking over PIA's liabilities of Rs. 457 billion was conditional to bringing in private sector management.

The Secretary Cabinet, Sardar Ahmed Nawaz Sukhera, argued that it would not be in accordance with Rules of Business, 1973 to make any decision, especially when it entails large sums of public money, on a presentation. He advised that a summary for the Cabinet be initiated by the Aviation Division, incorporating viewpoints of all stakeholders, so that everything is on the record as per rules and the Cabinet can take a well-informed decision. The Cabinet took note of the presentation by Adviser to the Prime Minister on Institutional Reforms & Austerity on PIA's Restructuring Plan and directed the Aviation Division to move a summary to the Cabinet, after incorporating views of all the stakeholders, for formal approval of the Restructuring Plan, as amended in light of the observations of the Minister for Finance & Revenue.

Copyright Business Recorder, 2021