YEAR-END REPORT CPA seeks solution to debt, revenue fall

Burdened with a $53 million debt, the Commonwealth Ports Authority faces the difficult task of maintaining an efficient operation in 1999 amid declining revenues brought about by a battered tourism economy.

Officials of the cash-strapped ports authority are now in desperate search for additional sources of revenue to meet debt service, operating expenses and complete capital improvement projects.

The financial problems besetting the ports authority could also be traced back to the mismanagement of the previous administration which used up $23 million in reserve and left some $23 million debt before the new CPA officials appointed by Gov. Pedro P. Tenorio took over.

When the new set of officers assumed their post, CPA incurred an additional $53 million debt in March 1998 to pay for its obligations with contractors and suppliers as well as retire the 1995 bonds because the former officials committed to implement various capital improvement projects without identifying the sources of funds.

As management failed to increase its revenue during the four year period (1995-1998), CPA sank deeper into financial crisis.

Confronted with this situation, board members should provide immediate solutions to the financial problems and set in place the fiduciary control which will make the ports authority a viable and successful autonomous agency again, said Rex Palacios, financial consultant of CPA.

“This leaves the board with no other choice but to make tough decisions this year. Unfortunately, the choices are very limited,” he said.

Way out

Two financial studies commissioned by CPA recommended the raising of landing fees in 1999 — an issue which has slowly gained political opposition.

While executive director Carlos H. Salas believes that increasing airport fees is the only way CPA can settle its obligations, board chairman Roman S. Palacios, however, is reluctant to make that choice.

“We have to explore ways of raising money first through non-aviation sources. If ever, it should be the last resort,” said Palacios. Aside from the Asian economic woes, Palacios blamed the present financial difficulty besetting the ports authority to the mismanagement of the previous CPA officials.

Although the ports authority has not increased its fees for the last 10 years, many people have questioned the timing of making such a decision as officials are trying to convince airlines to provide additional flights.

But Salas believes that the only alternative left against raising fees is the provision of a government subsidy to the ports authority, a very unlikely move since the administration is also struggling to survive. Salas maintained that the increase in rates is unavoidable because the money was already used to finance the necessary projects at the airports and seaports. He, however, assured the people that the proposed rate increases have been cautiously structured for the CNMI airports and seaport to remain competitive in the region. While these will have an effect on air fares and prices of consumer goods, it only represent a small fraction or margin of the entire cost, he added.

Asked if CPA made a mistake when it decided to float the bonds, Salas said “we never expected the economy to get worst. The crisis is simply beyond our control.”

Solutions

In early December 1998, CPA met with two U.S.-based bond rating agencies — Fitch IBCA and Standards & Poors to obtain ratings for the airport and seaport revenue bonds. The kind of rating which the agencies will give in March 1999 will determine how much money will be saved on payment of interest.

On top of this, Palacios said the ports authority must suspend the implementation of all of its projects until it can afford to do so. For example, he said the existing facilities of Saipan International Airport are adequate enough to handle the current passenger traffic.

As early as January of 1998, the ports authority has carried out various cost-cutting measures such as elimination of overtime hours, salary increases, freeze in hiring except in areas involving safety, reduced operation hours and encouraged employees to opt for retirement.

According to Salas, CPA has already set a goal of a 15 percent cost reduction mostly in salaries and benefits for fiscal years 2000 and 2001 at a cumulative savings of 30 percent.

CPA management, however, refuses to confront the issue of retrenchment to reduce the workforce which eats up more than 50 percent of the budget.

“No administration would want to remove people but this is a worst scenario which the ports authority should look into. The problem in Northern Marianas is that people are hired for political reasons, not because their positions are needed to operate efficiently,” said Palacios.

For fiscal year 1999, the airport operating expenses was budgeted to decline at $9.7 million from $10.9 million.

Operating expenses are projected to increase at an average annual compounded growth rate of 4.5 percent for the fiscal year 2000 to 2007.

Non-aviation revenues was estimated to reach $4.7 million in 1998. It is expected to drop to $3.7 million due to declining traffic during the period.

From fiscal year 2000 to 2007, non-aviation revenues are projected to increase at an average annual compounded growth rate of 5.2 percent based on current lease terms and provisions, activity, projections, anticipated impacts of inflation and effects of future capital projects.

At the seaport operations, the budget increased by 19 percent for fiscal year 1999 or a total of $1.37 million. With the exception of income from land and warehouse leases, the ports authority projected a 20 percent plunge in seaport revenue.

Outlook

Based on the financial analysis made by the airport and seaport consultants, Asia’s economic problems will affect the CPA operations in three more years.

Since the regional crisis will be felt until the year 2000, the airport would only experience a 4.5 percent growth in 1999, according to a study made by Ricondo & Associates. This means the airport will have to increase its landing fees by 68 percent from 85 cents to $1.40 cents per 1,000 pounds of aircraft gross landing weight.

The study attributed the loss in revenue to reduction in flights as a result of decline in outbound traffic in Asia which led some airlines to downsize their aircraft serving various markets.

An analysis of the seaport operations conducted by Booz, Allen & Hamilton, on the other hand, provides a gloomier outlook since it believes that the regional crisis will have a negative impact on the island until the year 2002, thus, the seaport would have to raise its fees by 30 percent in the year 2000 and 2002. An additional rate of five percent every five years will have to be made thereafter.

It said the pullout of the garment industry would have a devastating effect on the seaport revenue since more than 50 percent of the cargo containers coming in and out of Saipan belong to garment manufacturers.

Furthermore, the study warned against the use of seaport facilities in the transshipment of fish because it will not become a huge source of revenue for the ports authority.