Torres used federal pandemic funds to start up, subsidize MSA while raising costs on Star Marianas

Gov. Arnold Palacios has issued a statement condemning his predecessor’s misspending of millions in federal pandemic funds to start up and subsidize an airline in direct competition with decades-old Star Marianas.

The governor, backing his secretary of finance’s February 21, 2023 notice of cancellation of an $8 million contract approved by former Gov. Ralph Torres to Marianas Southern Airways, confirmed there was no competition for the federal funds. The $8 million contract was awarded to MSA through sole source procurement in March 2022, according to the governor’s statement.

Of the $8 million obligation, several advance payments totaling $2.4 million already had been made under the Torres regime to MSA. The payments, according to the governor occurred onAugust 16, August 30, and twice on November 10, 2022. The Commonwealth government has no more money to fulfill the remainder of that contract, as it faces a more-than-$300 million General Fund deficit, and an $80 million over-obligation of federal pandemic funds.

“Former Governor Torres overcommitted the Commonwealth and overpromised money we did not have then and do not have now,” Mr. Palacios said.

“It is unfortunate that we find ourselves in this situation, but the lack of a funding source to pay for the $8 million sole source contract necessitated the cancellation of the contract,” Sen. Paul Manglona said today at a hearing of his Senate Public Utilities and Transportation Committee.

“My administration is still assessing the extent of ARPA mismanagement, but what is crystal clear at this point is that these funds were misspent and overspent and ARPA accounts are now in deficit in the tens of millions of dollars,” Governor Palacios stated.

The contract with MSA goes beyond the funding for the governor, though.

“We want our Commonwealth to be a place where all businesses know they can operate and compete on a level playing field,” Mr. Palacios said. Mr. Torres wrecked such a field, when his administration subsidized MSA while his Commonwealth Ports Authority continuously harassed Star Marianas with increased fees that nearly drove the company under. Star Marianas, which has provided inter-island air service for decades and suffered during the pandemic, received no local subsidies, or subsidies derived from federal pandemic funds.

“I question the fairness and wisdom of issuing such a lucrative agreement to a new private venture when an existing competing vendor was already providing the same service and was not offered a similar opportunity,” Mr. Palacios said.

Then-Gov. Ralph Torres and Gov. Lou Leon Guerrero enjoy the view of a Marianas Southern Airways plane on the tarmac of the Guam International Airport after Torres landed on Guam on MSA’s inaugural flight to the southern island.

According to the contract, the sole source procurement of this $8 million deal was signed off by the directors of procurement and financial services, then-Secretary of Finance David Atalig, jr., the attorney general, and then-Gov. Torres.

The contract gave MSA an immediate infusion of $1.5 million for its start up costs. On top of this, MSA was to provide flights to and from Saipan and Guam at no more than $99, Tinian and Saipan at no more than $39, Rota and Saipan at no more than $69, and Rota and Guam at no more than $69 for the first six months of operation. Their costs have since gone up. In return, each of those flights per-passenger costs were subsidized by the CNMI government at about 500 percent of the charge rates, making the actual cost of inter-island air service aboard MSA substantially more expensive than that of Star Marianas.

Neither the contract nor its appendices show or indicate who or where the deal began. The earliest dated document is a March 10, 2022 letter from Mr. Atalig to procurement services director Francisco C. Aguon providing so-called justification for sole source award of the $8 million contract.

We provide the full contract, along with its appendices below:

MSA contract with CNMI government

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