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Endorsement of Letter No. Pr.cum PAO/DoNER/IAW/2010-11/104-112 dated: 08.03.2011

issued by Sr. Accounts Officer (IAW).

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(a)p Releases made by NEC under the scheme for improvement of Air Connectivity in the
NER with reference to release made to Alliance Air (An Air India Subsidiary)
(b)pReleases for construction/improvement of Airport to State Governments under the
Scheme for Strengthening of and improvement of Airport in North Eastern Region.
p Lengpui Airport Aizwal, Mizoram.
p Passighat and Tezu in Arunachal Pradesh.

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i.p Sh V K Singh, Accounts Officer

ii.p Sh Mahesh Kumar, Accounts Officer
iii.p One member from NEC or DoNER (to be nominated by NEC/DoNER)

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i)p The audit to cover the locations in Mizoram, Arunachal Pradesh and Kolkatta in
addition to Shillong.
ii)p The audit to cover the financial as well as administrative aspect of each item on the
basis of the record available and provided to the audit party by the Scheme
implementing agencies concerned i.e. NEC, Alliance Air and Public Works Division ʹ
III (Project) at Aizwal, Mizoram.

  

i)p ?nder the constitution of the audit party one member from NEC or DoNER ( to be
nominated by NEC/DoNER) was required to join the audit. However, despite
repeated requests no name was recommended till the date of departure of the audit
party and ultimately no one from NEC/DoNER joined this audit.
ii)p While gathering information regarding financial releases made by NEC to Scheme
implementing agencies, it was observed that no funds have been released for
Construction/Strengthening of Airports at Passighat and Tezu in Arunachal Pradesh.
Hence, the audit party had no reasons to visit Arunachal Pradesh.
 iii)p To review the scheme for improvement of Air Connectivity in the NER with reference
to release made to Alliance Air, the Audit Party visited their Operational office at
Kolkatta. Captain Sanjay Gupta, In Charge, AASL (Ops) E/R vide his letter No.
AASL/CAL/11 dated 15.3.2011 informed that all documents and items are available
at their Headquarter, Delhi. The audit party, thus, with the permission of Supervisor
of the Audit Party ʹ Dy.C.A.,NE, MHA visited the Headquarter of Alliance Air situated
in Delhi for further scrutiny of record and information available there.
iv)p In compliance of the Letter No. Pr.cum PAO/DoNER/IAW/2010-11/104-112 dated :
08.03.2011 issued by Sr. Accounts Officer (IAW) this party visited the Aizwal and
approached the Civil Aviation Department, Government of Mizoram, who informed
that they have no role in execution of the said work and the same was got executed
through the Executive Engineer, Public Works Division ʹ III (Project) at Aizwal,
Mizoram. This party then approached the said Division and conducted the audit.
v)p In response to requisition of several items of record relating to tendering for the
work ʹ Strengthening of Lengpui Airport runway pavement, Public Works Division ʹ
III (Project) at Aizwal, Mizoram informed that the tender was not called by this
Division as such material required is not available in the Division. The Audit Party
personally met the Executive Engineer of the Division to find out why the related
records were not collected before issue of the Letter of Intent and signing of
Agreement. It was assured that the requisite records will now be obtained and
produced to audit but the same was not provided. Hence, the Audit Party had no
option except to conclude the audit without scrutiny of the said items of record.
vi)p All the payments made to Alliance Air for air connectivity in NE Region are on ͞On
Account Îbasis and the MO? signed with effect from 2002-03 is still in force with
certain amendments. Since, the work has not been completed and full/final
payment has not been made/settled, the exact and final financial implications
cannot be worked out at this stage. However, the financial implication as on today
have been worked out by taking payments made as final and the same are
incorporated in the  % .

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During the course of special audit, scrutiny of record revealed some irregularities,
lapses, omissions and deficiencies which have been scheme-wise detailed as under:

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r%"" !#$"! !-. : The MO? between Airline
Allied Services Limited a wholly owned subsidiary of Indian Airlines Limited (known as Alliance
Air) party of the First Part  North Eastern Council, Ministry of Development of North Eastern
Region, Government of India (known as NEC) party of the Second Part was made and signed on
the 4th day of August, 2004. ?nder the conditions of MO? the first party was agreed to provide
4 ATR-42-320 Aircrafts for air connectivity in North Eastern Region for a period of five years
effective w.e.f. the year 2002-03, for which the Second party will give compensation of .175
crores (i.e. .35 crores per annum). No reasons are available on record for incorporating the
period from 1.4.2002 to 4.8.2004 which had already been lapsed at the time of MO?. This
clearly shows that flights operated by Alliance Air in the NE Region during period from 1.4.2002
to 4.8.2004 was as per the trade practice of the Alliance Air without any settled terms and
conditions and the payment made for this period was thus, unwarranted and the same could
have been avoided by NEC. As per the information provided by the Airlines vide their letter
dated 24.03.2011 Date of first flight of the requisite four ATRs is 25.12.2002, 16.01.2003,
7.03.2003 and 08.03.2003 respectively which are much later than the effective date of the
MO?. Even no record of flights made by the Airlines in NE Region or performance reports if
any, provided by the Airlines is available on record in NEC.

.   
   /%#  #  ! .012   In each
ORDER for release of payment of Grant under the MO? for air connectivity in NE Region it has
invariably been incorporated that ʹ A bar chart showing time frame for completion of work
(item-wise) would be submitted by the Airline Allied Services Ltd to NEC Secretariat within
three months from the date of issue of each order. Further, quarterly physical and financial
report should be submitted by the Airline Allied Services Ltd regularly to the Advisor (T&C), NEC
Secretariat, Shillong. However, no such bar chart, quarterly financial and physical report was
available on record in office of the Airlines or provided to this audit party by the NEC Secretariat
which shows that the bar chart/reports have neither been prepared or submitted to the NEC till
January, 2008 and the Grants were released to the Airlines without ensuring the compliance of
the terms and conditions of the MO? or recovering the proportionate amount for deficiency in
services as per the terms and conditions or the MO?. In absence of the performance report the
quantum of deficiency cannot ensured and the loss thus, cannot be calculated. In this regard it
is worth mentioning that the NEC has made some deductions on the basis of the performance
reports which were received after 2008 onwards. However, if the deficiencies are taken on
average for the period for which the reports were submitted i.e. 2008,2009,2010 the average
deficiency in service comes to 16.88% and proportionate amount of recovery for the period
from 2002-03 to 2007-08 worked out to . 29.54 crores.

  '" !!""3-14 ?nder

the terms of MO? amended for the year 2009 financial support to Alliance Air was approved for
.38.5 crores vide Administrative Approval dated 05.03.2009. The first party i.e. Alliance Air
provided the air connectivity to NE Region on the said financial support during the entire
Calendar year. However, on 25.03.2010 when the entire Calendar Year was about to close,
without receiving any protest/demand NEC issued another Administrative Approval revising the
said financial support from .38.5 crore to .47.07 crore w.e.f. 1.1.09 to 31.12.2009. This has
resulted into loss of .8.57 crore to NEC.

2  $%##! !r151 ?nder

the Clause 10 of the terms and conditions of MO? dated 20.12.2007 for the year 2008;
extended for the year 2009 vide Administrative Approval dated 05.03.2009 and also dated
25.03.2010; further extended for the year 2010 vide MO? dated 10.11.2010 ʹ Performance by
the party of the second part h


  is the essence of the MO?. It would be the
bounden duty of the party of the second part to strictly adhere to the capacity provisioning and
schedule of flight per week given in its Appendix. In case service or any part thereof are not
provided for the reasons within the control of the Airline, the subsidy payable shall be deducted
at pro-rata basis in terms of the capacity provisioning agreed.

Further, Clause 8 of the terms and conditions of the aforesaid MO?s and Administrative
Approvals provides ʹ Either Party shall not be responsible for any failure to perform due to
unforeseen circumstances or to causes beyond their reasonable control, including but not
limited to act of God, war, riot, embargo, act of civil or military authority, fire, floods, accidents,
terrorist activities, strikes, fuel, energy, labour or materials. In the event of any such delay
parties would differ the date of executing their responsibilities for a period equal to the time of
such delay.

As per the record provided to this Audit Party, NEC has deducted an amount of . 5
Crores for the year 2008 and .2.0769 Crores for the year 2009 on account of deficiency in
service out of the said subsidy on Pro-rata basis on the basis of the performance report
submitted by the Airlines. However, the Performance Reports of the Airlines has justified some
of the missing flights by stating the same could not be made operational due to Technical/
Engineering reasons, Non availability of Crew, shortage of ATR etc. which are well within the
control of the Airlines and the same are also required to be termed as deficiencies for the
purpose of pro-rata recovery but the said lame excuses have been accepted by the NEC and no
recovery for such deficiencies have been made. The total amount of recovery on account of
deficiencies within the control of Airlines for the years 2008, 2009 and 2010 worked out to
.22.73 crores but as per the record provided by NEC only . 7.0769 Crores have been proposed
and recovered on account of deficiencies in performace which has resulted into short recovery
of .1565.31 Lacs for the said period of three years.
1    "    / !"        
?nder the Clause A (b) of the terms and conditions of MO? dated 04.08.2004 Guwahati airport
shall be made primary operational base for improving air connectivity to airports in NE Region
by Alliance Air. Further, under clause 3.2.2 of terms and conditions of MO? dated 20.12.2007
and the MO? dated 10.11.2010 ʹ At least one aircraft would be based at Guwahati Airport for
early morning departure in order to facilitate the passenger movement to /from/ within the
Region. In case of failure of Alliance Air to place aircraft at Guwahati compensation .15,000/-
per night would be recoverable by NEC. A margin of 20% to cover contingencies including
weather/ operational and technical reasons would be kept while recovering the compensation
from Alliance Air. A quarterly report about placement of aircraft at Guwahati would be
submitted by Alliance Air to NEC.

However, it has been gathered from the record that the Guwahati has not been
operational base for air connectivity in NE Region till date. This has resulted into considerable
financial saving to Alliance Air on making infrastructure i.e. hangers, offices, base staff etc. and
Kolkata has been retained as primary operational base. Due to non-shifting primary
operational base to NE Region at Guwahati the air-connectivity within the NE Region has been
suffered by providing additional flight to Kolkata for more commercial benefit and the purpose
of providing financial support/subsidy is defeated.

Further, after incorporation of penalty clause in the MO? dated 20.12.2007 onwards,
the Alliance Air has been parking one aircraft at Guwahati as Night Halting (as per the copy of
quarterly report provided to Audit) but the purpose of Night halting/parking is defeated
because the same is operated from its operational base at Kolkata as no authorized official is
available at Guwahati to take on the spot decision on the basis of the facts and circumstances.
Even as per report one aircraft has been parked as Night halt at Guwahati but time of its
departure from Guwahati has not been mentioned to see whether there was actually early
morning departure in order to facilitate the passenger movement to/from/within the Region.
As such the purpose of obtaining Quarterly report is also defeated. These reports have been
accepted by the NEC as valid for proof.

5!!%#!%#" A review of quarterly performance reports

submitted by Alliance Air revealed that the Airlines is focused only on the profitable air routes
and left some of the routes at all e.g. January and April, 2008 ʹ Kolkata/Shillong/Tezpur/Kokata,
Kolkata/shillong/Jorhat/Kolkata, Kolkata/Aizwal/Kolkata; February and March 2008 - Kolkata/
Shillong/Tezpur/Kokata, Kolkata/Aizwal/Kolkata. The air connectivity remained suspended on
some routes every month throughout the period covered by this audit. This has defeated the
purpose of providing ATR frequency in the North East as Annexure to the MO?. It also shows
the intention of the Airlines not to follow the terms and conditions of the MO? despite a hefty
amount is paid to them by NEC every year.

4!!'A review of MO?s revealed that the terms and conditions have
not been drafted keeping in view the nature of work as such the desired results could not be
achieved. i) Sectors/air routes have not been agreed with frequency for the desired air
connectivity in NE Region. ii) Penalty clause not incorporated for non-compliance of any terms
or condition of MO? or for deficiency in services. iii) ?nder clause A(g) of MO? the
performance of the scheme will be reviewed in 2005-06 by DoNER/NEC/MOCA and thereafter
as required. Since, no performance report has been furnished by the Airlines it was not possible
to review the scheme. When the scheme was to be reviewed in 2005-06, why the MO? was
signed for five years upto 2007.

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r %"    55     "#  !"  *3 The work for
strengthening of Lengpui Airport runway pavement was got executed by PWD ʹ Project Division
ʹ III through contractor by calling tenders vide IFB No. 3/EE/PD-III/2007-2008 dated 07.02.2008.
Time & Date of Bid Opening was 1300 Hours on 25.2.2008. Para No. 8 of the said IFB provided -
͞The bid for the work shall remain open for acceptance for a period of 90 days from the date of
opening of bids͙͙͟ This implies that the work is scheduled to be awarded within a period of
90 days from the date of opening i.e. on or before 25.05.2008. Para No.1 under column 6 for
the said bid further provide that the Period of completion of the work is 4(four) months i.e.
25.09.2008. However, as per the record made available to audit the work was awarded vide
Agreement No. 6/EE/PD-III/2008-09 on 30.09.2008 and the work was actually completed on
25.02.2010, as mentioned in the Executive Engineer͛s Completion Report. This clearly shows
that had the work been completed as per the scheduled time frame, it could have been
completed 17 months earlier.

In this regard it is worth mentioning that as per the Benefit Analysis of Lengpui Airport
Strengthening work the said work will provide financial benefit of .22.46 Crores within 5 years
after the completion of work. Thus, by delaying the completion of work by 17 months the State
Government suffered a loss of . 636.366 Lakhs (worked out on proportionate basis).
. %    !% #
 121 3$  As per Para ʹ 3 of the Letter dated
22.2.2010 of EE, PWD, Project Division-III addressed to the SE, PWD, Project Circle and amount
of .71,56,938 will be utilized for installation of ILS (Instrumental Landing System) at Lengpui
Airport. However, the S.E. (Monitoring) on behalf of Eng ʹ in ʹChief, PWD vide his letter dated
24.02.2010 allowed the deviation of funds for installation of ILS to tune of .53.45 Lakhs on the
condition that the said amount shall be replenished when the fund/sanction for installation of
ILS at Lengpui Airport is received. But the said amount of .53.45 lakhs have not been
replenished till the date of Audit.

 '" !#  '# $'  '  41. 3$  NEC has accorded
Administrative Approval of .14.92 Crores for Strengthening of Lengpui Airport runway
pavement in Mizoram as Grant debitable to the Major Head 3601- Grant-in-Aid to State
Government, 05- Grants for special plan/schemes, 05.101- Schemes of North Eastern Council,
02 - Special Development Projects, 02.00.31 - Grants in Aid, to Mizoram Government for
execution of the work through their state PWD. The amount of Grant included an amount of
.75.23 lakhs (@ 6.5%) which is not justified in view of the fact that the amount has been paid
as Grant in Aid to the State Government for their Project and the work was also executed by
the same State PWD (the agency of the same State Government). Hence, the amount on this
account claimed by the State Government/approved and paid by the NEC is irregular which is
loss to NEC and undue benefit to the State PWD. Till the date of Audit an amount of .36.11
Lakhs have already been claimed and utilized by the State PWD on this account.

2 '" !# 
9! %  2:0 3$  ?nder Para 2(b) of
IFB No. 3/EE/PD-III/2007-2008 dated 07.02.2008 the bidder should possess the following Plants
and machinery:

i. Computerized Hot Mix Plant (-:/r:: !#).

Ii
"   Paver having minimum width 7.5 mtr.

However, as per available record the contractor brought the above plant/machinery of
different/lower specification at site for execution of the work and the department accepted the
same for granting the Equipment Advance of . 43.09 Lakhs for bringing HMP Drum Mix Model
!#21/5:  and #"c  Paver. This has not only resulted into compromising
the quality of work but also irregular payment on account of Equipment Advance which is
undue benefit to the contractor.

To be continued