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C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 000163 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: DECL: 02/23/2020 
TAGS: PGOV ECON EAIR PREL NP
SUBJECT: NEPAL: AIRBUS DEAL IN TROUBLE, EU LOBBIES HARD 
 
REF: 09 KATHMANDU 1046 AND PREVIOUS 
 
Classified By: Charge d' Affaires, a.i., Donald A. Camp. Reasons 1.4 (b 
/d). 
 
¶1. (C) Summary.  The Government of Nepal is unlikely to 
guarantee the Nepal Airlines Corporation (NAC) loan to 
purchase two Airbus aircraft, according to Finance Secretary 
Khanal, essentially killing the deal and reviving Boeing's 
hopes to sell its aircraft to the NAC.  The European Union 
continues to lobby aggressively for Airbus, most recently by 
sending a strongly-worded letter to the Prime Minister urging 
him to complete the Airbus purchase immediately (full text in 
para 8).  End Summary. 
 
Finance Ministry Against Deal 
----------------------------- 
¶2. (C) During a February 22 meeting with Charge, Finance 
Secretary Rameshwor Khanal said the internal Finance Ministry 
committee reviewing the Nepal Airlines Corporation decision 
to purchase two Airbus aircraft -- a narrow- and wide-body -- 
had completed its work.  While the committee report is not 
public, Khanal told Charge it concluded that the purchase of 
the Airbus aircraft, particularly the wide-body, "cannot be 
justified at the proposed price" (approximately USD 134 
million). 
 
¶3. (C) Khanal said that the Ministry of Finance decision 
would likely become public within ten days, after the 
committee makes some technical corrections in the report 
data.  Based on this report, the Ministry of Finance would 
recommend against providing a sovereign loan guarantee for 
the Airbus purchase.  (Note: Because of the NAC's poor 
financial condition, it is unlikely to be able to raise 
sufficient funds privately to purchase the planes.  End 
note.)  The Ministry of Finance would instruct the Ministry 
of Tourism and Civil Aviation to cancel the Nepal Airlines 
Corporation procurement, and reopen the bidding, most likely 
for two narrow-body planes, which independent analysts 
believe are better suited for the NAC's current and planned 
routes and financial situation.  Noting that the NAC fleet 
currently has two Boeing 757 aircraft, Khanal said buying new 
Boeing planes is logical since the NAC could use its spare 
parts inventory and would not have to retrain the crews on 
new equipment. 
 
¶4. (C) Charge thanked the Finance Secretary for the 
Ministry's careful review of the NAC purchase and reiterated 
U.S. support for a transparent and fair procurement process. 
He noted Boeing is ready to provide new bids quickly if the 
NAC reopens bidding and does not believe the new procurement 
process will unnecessarily delay the delivery of new aircraft. 
 
¶5. (C) Charge also raised the Nepal Airlines procurement with 
ForMin Sujata Koirala, who confined her response to the need 
for new planes quickly, which we read as support for Airbus. 
 
EU Not Giving Up 
---------------- 
¶6. (C) In the face of growing concerns about the Airbus deal, 
the European Union sent a strongly-worded letter to Prime 
Minister Nepal on February 11, which was leaked to the press, 
urging the PM to complete the deal on schedule and to resist 
"undue pressure being used by opposing vested interest 
groups."  (Note: Post received a copy of the letter from a 
source in the PM's office.  End note.)  The letter makes 
inaccurate statements, including the claim that the Public 
Accounts Committee (PAC) report does not challenge the "core" 
of the deal (whereas the PAC recommends against the purchase 
of the wide-body plane).  It also claims that canceling the 
Airbus deal would undermine the confidence of foreign 
investors (whereas the suspected corruption surrounding the 
Airbus deal raises serious questions about Nepal's foreign 
 
KATHMANDU 00000163  002 OF 002 
 
 
investment climate). 
 
Comment 
------- 
¶7. (C) The Finance Secretary's comments on the Airbus deal is 
very positive news for Boeing, but Post remains cautious. 
Powerful political forces, including Deputy Prime Minister 
B.K. Gachchhadar, strongly support the Airbus deal.  A close 
Embassy contact on the PAC recently alleged that Gachchhadar 
offered him a bribe to support the deal, and even threatened 
the PM that he would pull his party (MPRF-D) out of 
government if the Airbus deal did not go through.  Post will 
continue to reach out to key contacts to press for a 
transparent and fair process. 
 
Text of EU Letter 
----------------- 
¶8. (SBU) BEGIN TEXT OF EU LETTER: 
 
Regarding the acquisition process of two new aircraft by 
Nepal Airlines (NA) 
 
The Heads of Mission of France, Great Britain, and the 
European Union delegation would like to draw the kind 
attention of the Honorable Prime Minister, Mr. Madhav Kumar 
Nepal, and the Government of Nepal on the following points 
regarding the acquisition process of two new aircraft from 
Airbus by Nepal Airlines. 
 
Airbus Industries has won an international open tender by 
sealed bid for the purchases of one narrow body and one wide 
body aircraft by Nepal Airlines. 
 
Nepal urgently needs new aircraft and better access to the 
European market.  In this context, the choice of a wide-body 
aircraft makes perfect sense and will be both instrumental 
and indispensable to stop the loss of market share of Nepal 
Airlines on international routes.  The rationale for buying 
one narrow body and one wide body aircraft have been examined 
by Nepal's best trained professional minds. 
 
The irregularities listed by the Public Account Committee 
(PAC) do not concern the core of the deal.  The PAC has 
indeed not been able to list precise irregularities, which 
implies that no serious infringement has been found. 
Moreover, the PAC has actually recommended proceeding 
immediately with the acquisition of new aircraft: "After 
taking into accounts all the study till to date and after 
discussion with entire stakeholders, it is recommended to 
proceed immediately for purchasing new aircraft for NA taking 
into account the need and capacity." 
 
The Envoys would welcome legal action against the guilty 
parties as warranted by law if irregularities are confirmed, 
but to jeopardize the acquisition of this basis is out of 
proportion.  It is also self damaging for Nepal where having 
a secure business operating environment to give confidence to 
foreign investors is of great importance. 
 
The tendering process has been exemplary so far.  Airbus has 
clearly and convincingly won with the best possible offer for 
Nepal as it also has in so many other countries. 
 
The Envoys have been made aware that undue pressure is being 
used by opposing vested interests groups and strongly urge 
the Government not to give in to pressure and to complete 
this deal as planned in accordance with the signed contract. 
 
Kathmandu, 11 February 2010 
 
END TEXT 
CAMP