It is not very often that public sector in Pakistan takes big steps to facilitate the public. One can enumerate a number of reasons for this indifference or lack of concern. This does not mean that there has never been any development.

But often many of these endeavours of the past have not been without misgivings. This, unfortunately, has not only eroded the credibility of our public sector but has also kept it unnecessarily on the defensive.

The PIA's induction of Boeing 777 is one such example of its efforts to improve and modernize its fleet on long-haul routes where it was facing stiff competition. Much has been said- discussed and written on the subject.

For those who understand the technicalities of aviation industry and the complexities of borrowed financing, it is a transparent deal. For a common man, however, there are a few unanswered questions which we can discuss in a simple manner.

The first and foremost question is as to why the PIA decided to buy Boeing aircraft and not any other make? Or why new aircraft and not used ones? One wonders if the same question would not have come up had there been a different decision.

Anyhow, the Aircraft Acquisition Committee formed by the Board of Directors of the PIAC, contacted the two top aircraft manufacturers - Boeing, an American company, and Airbus, a French concern.

The former offered 777 family aircraft while the latter offered A340s. These were weighed in the light of the marketing, financial, and operational aspects of the fleet renewal programme of the PIA. Accordingly, the induction of the following new wide bodied long-haul aircraft was envisaged:

* Three 777-200ER or A340-300

* Two 777-20OLR or A340-500

* Three 777-300ER or A340-600

The project cost of the eight Boeing 777 family aircraft was determined to be $1.54 billion as compared to $1.35 billion for eight A340 family aircraft. Although the project cost of Airbus was lower than the Boeing, the overall economics of the 777 was better due to superior technology and higher revenue earning potential.

Boeing 777 is faster than A340 yet fuel burn per seat is lower. The 777 have more capacity, better operational reliability, wider cabin with improved cabin environment, and greater passenger appeal.

Despite late entry 777s outnumber the A340 in terms of aircraft in service. Their industry operational reliability is also better. Historically, Airbus aircraft are more prone to corrosion than Boeing aircraft.

The PIA also explored the market of used aircraft. In response, United Airline offered a comprehensive package including used 777-200ER for $98.1 million per aircraft.

After interior re-configuration these aircraft would still have fewer seats and two less toilets resulting in lower revenue potential and passenger comfort. Moreover the maintenance cost would have been higher by approximately $45 million as compared to new over a 15 year period.

It may be mentioned here that the events of 9/11 had turned the aircraft market into a buyer's market. Therefore PIA was able to obtain substantial concessions from the manufacturers for the new 777s.

In pursuance of the PIA policy and GoP's requirement, the agreement signed with Boeing contains a "No Broker" clause whereby Boeing has been contractually bound to neither give any commission nor to involve any intermediary in the deal. If violation of this clause is ever established, Boeing is liable to pay the penalty to the PIA.

Furthermore, US Export Import Bank (commonly known as Ex-Im Bank) offered loan guarantee to the PIA to secure financing for 777 aircraft whereas Airbus was unable to come up with any such firm commitment. It was due to this guarantee that the PIA was able to avail a highly competitive financing package.

AS a standard requirement of Ex-Im Bank. the transaction is always a 'finance lease' which invariably requires a special purpose vehicle (SPV) to be organised in a tax efficient jurisdiction (be it in Bermuda, Cayman Islands or Delaware).

From the bank's stand point as guarantor, the SPV structure in an offshore jurisdiction has the advantage of the lender on record being established in a tax efficient and stable jurisdiction with developed financial ' legal, judicial and regulatory systems and having sound infrastructure and satisfactory sovereign risk rating.

In order to ensure that the SPV is bankruptcy remove, the shares of the SPV are customarily held by a charitable trust established for that purpose the beneficial interest in which is indirectly held for general charitable purposes.

In such transactions, the SPV is an exempted company. As the name implies, an exempted company can successfully apply for exemption for any tax that may be levied on income or capital of the company.

The purpose of the SPV is to act as the obliger/borrower under the Ex-Im Bank supported financing. The SPV essentially acquires the underlying assets or asset pool from the borrower and this leads to the following benefits to the borrower:

i. removal of the underlying assets or asset pool from the balance sheet; ii. improved liquidity; iii. reduction of interest, currency and maturity risk. iv. accelerating the recognition of income or loss.

For acquisition of the three Boeing 777 aircraft by the PIAC, an SPV by the name of Taxila Limited was incorporated in Cayman Islands. The shares of Taxila Limited are held by a trustee - Maples Finance Limited - on trust for a charitable trust (Taxila Limited Trust).

As part of the financing structure, the Purchase Agreement between the Boeing Company and the PIAC was assigned by PIAC to Taxila Limited pursuant to the 'purchase agreement assignment' dated as of December 15, 2003.

The directors of the Taxila Limited are Philip Hinds, Phillipa White, and Helen Allen. These persons are simply lawyers/officers employed by a well known legal-financial group.

This is a very standard/typical finance lease arrangement which is commonly employed, inter alia, by airlines to finance acquisition of aircraft. Notwithstanding the legal ownership of the aircraft by Taxila Limited, all the 'rewards' and 'obligations' of the aircraft are to the account of the PIAC.

There is a lease agreement between Taxila and the PIAC for a 12 -year term. Under this 'master lease agreement', the PIAC is required to pay rent in an amount at all times equal to the corresponding quarterly payment required to be made by Taxila Limited under the Ex-Im.

The bank guaranteed financing. At the end of the said 12-year term the technical legal ownership of the aircraft gets transferred to the PIAC formally against payment of one US dollar.

Since the PIAC has obtained financing through Citigroup against the US Ex-Im Bank Guarantee to pay for the aircraft in full to the Boeing Company, the SPV Taxila Limited is simply a financing arrangement based on a finance lease structure which has been put in place to service the borrowing/financing obtained through the Citigroup under the Ex-Im Bank Guarantee to comply with the securitization requirements of Ex-lm Bank and the Lenders.

The transaction has bee recognized by government of Pakistan as a 'financing arrangement' and has been certified as such by Messers A.F. Ferguson & Co. Karachi.

The negotiated and agreed purchase price for the three Boeing aircraft purchased by the PIAC (under the purchase agreement No. 2418 dated October 30, 2002) has been fully paid to the Boeing Company for and on behalf of the PIAC.

This has been paid partially from PIAC's own resources, partially through the pre-delivery financing of $150 million obtained by the PIAC by way of 'Ijara' and then the major portion from the financing organized through Citi group under the Ex-Im Bank Guarantee. Having fully paid the price for the said aircraft, the beneficial ownership rests with the PIAC and no further payments are due to the Boeing Company.

(The writer is General Manager, Public Affairs, PIA.)