What’s in the MSA contract?

Acting Division of Procurement Services director Francisco C. Aguon had certified that the $8-million sole-source contract between the Department of Finance with the startup interisland airline, Marianas Southern Airways, is in compliance with the CNMI Procurement Regulations, and that the contract does not waste or abuse public funds.

A copy of the Contract for Purchase of Service-Airline Incentive Agreement obtained by Saipan Tribune Friday showed that Aguon also stated on March 10, 2022, that he believes the contract is for a public purpose and the contractor, Marianas Pacific Express LLC, is a responsible contractor.

A copy of the contract and other documents obtained by Saipan Tribune showed how then-Finance secretary David DLG Atalig started the request for the sole-source contract, up to the point when acting Finance secretary Tracy B. Norita issued a letter notifying MSA that the government would be terminating the contract due to lack of funding.

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Based on the documents, it showed that Atalig had certified on March 10, 2022, that the funds for the $8 million are available and have been committed for funding of this contract. He also declared that he has complied with the Commonwealth procurement regulations.

On that same day, March 10, Atalig wrote Aguon, requesting approval to execute the sole-source contract with Marianas Pacific Express LLC.

Atalig said Marianas Pacific Express LLC is to operate regular flights at set rates between the islands of the CNMI, as well as between the CNMI and Guam. He said Marianas Pacific Express LLC, doing business as MSA, is a joint venture affiliated with Southern Airways, a reputable U.S.-based airline consisting of 39 flight destinations, 222 daily departures, and 35 aircrafts total. Atalig said Southern Airways’ many flights focus on interisland commuter air-travel including interisland flights between the Hawaiian islands. He said Southern Airways is also an interline partners with three major airlines: United, American, and Alaska Airlines.

David DLG. Atalig, Edward Manibusan, Gilbert Birnbrich and Francisco C. Aguon

Atalig said a section of the Procurement Regulations permits an agency to procure services without using full and open competition such as a sole-source procurement. He said sole-source is allowed, among other criteria, where officials with expenditure authority, before executing the contract, shall justify to the Procurement and Supply director in writing about the need for contracting, the purpose of the contract, and how the expected outcome would help the agency achieve its objectives.

Atalig said the proposed contract with Marianas Pacific Express LLC satisfies each of the criteria for sole-source procurement.

He said that only one airline, STAR Marianas Air, provides commercial passenger flight travel between Saipan, Rota, and Tinian on a regular basis. Atalig said only one airline, United Airlines, provides commercial passenger flight travel between the CNMI and Guam.

He said that, as a result of the COVID-19 pandemic, the CNMI’s economy, which is solely reliant on international travel and tourism, has halted and commercial activities on all three islands have been detrimentally impacted.

Atalig said this new means of air-transportation will allow tourists and potential visitors a secondary accommodation option and additional flight schedules for travel into Saipan transiting from Guam.

He added that because there is a lack of flight availability into Rota and Tinian, it is costly and inconvenient for tourists to visit these two islands.

Response to legal comments

On March 16, 2022, Gilbert Birnbrich, then-legal counsel to then-governor Ralph DLG Torres, wrote Attorney General Edward Manibusan to assist Finance in facilitating the completion of the proposed contract with MSA.

Birnbrich said his memorandum is meant to address Manibusan’s comments and suggestions that were conveyed to him (Birnbrich) and Atalig through emails on March 14, 2022.

Birnbrich informed Manibusan that they have taken his suggestion and revised the indemnity clause in the proposed contract to only be applicable to the CNMI instead of being a mutual indemnity clause.

As for the suggestion that they include a provision where MSA must obtain insurance and the CNMI is named a beneficiary in case of loss, they do not believe such a clause is needed for this agreement, Birnbrich said.

He pointed out that first and foremost, the CNMI does not have an insurable interest.

“Here, if a plane crashes, nothing of value to the CNMI is lost. It is, of course, a horrible loss for the people on the plane, families of those members, and for the airline. However, it is not a loss for the CNMI in any direct property or pecuniary way,” the legal counsel said.

Citing the Marianas Visitors Authority’s airline incentive agreement, Birnbrich noted that the CNMI has never to his knowledge required insurance in an airline incentive agreement.

Even more, he said, airlines are a highly regulated business.

Birnbrich said Marianas Pacific Express LLC is affiliated with a reputable and successful airline, Southern Airways, which has immense experience with interisland travel across the nation and is the only available interisland air-transportation provider that can immediately meet the CNMI’s need for more affordable and accessible interisland travel options within the Marianas.

He said they believe that the agreement protects the CNMI and gives real value for its investment.

Birnbrich said they also believe that the agreement “is a fantastic opportunity for the CNMI to make a better life for the people of the islands and the tourism industry upon which it depends.”

On March 17, 2022, Manibusan certified that the contract has been numbered, reviewed and approved as to form and legal capacity.

On March 21, 2022, Aguon issued a memorandum addressed to Atalig, stating that the processing of the contract is completed and that Atalig may proceed with the contract implementation.

On the same day, March 21, 2022, Torres and Marianas Pacific Express LLC manager/president Keith J. Stewart signed the contract, which states that the federal government, through the American Rescue Plan Act, U.S. Public Law 117-2, subtitle M, section 602(c), provided funds to the CNMI whereby the CNMI could, in turn, provide funding to maintain or revive tourism and tourism-related activities in the CNMI.

Incentive programs

The purpose is to incentivize Marianas Pacific to provide interisland passenger and cargo service in the Mariana Islands.

The incentive framework will take the form of an Initial Incentive Fund, a Flight Incentive Program, and Governmental Related Pricing.

The contract will remain in effect for two years beginning on the date the notice-to-proceed was issued.

Under the Initial Incentive Fund, the CNMI shall provide to Marianas Southern $1.5 million in ARPA-sourced funding for the purpose of mitigating startup costs for the airline.

Startup costs include acquisition or mobilizing of aircraft/fuel and equipment, staffing, flight crews, training, travel costs, consultants, preparing counter space at CNMI airports, and cots related to those activities.

Under the Flight Incentive Program, Marianas Southern agrees that during the “incentive period,” it will provide a minimum of 42 weekly departures serving Saipan, Tinian, Rota, and Guam.

Marianas Pacific Express also agrees that, as soon as possible, but no later than three months after commencing operations, MSA will offer same-day connectivity to Saipan with United Airlines’ Honolulu-Guam flight.

Under Government Related Pricing, subsequent to the first six-months of the incentive period and for the rest of the incentive period, MSA shall implement and administer a corporate discount program for official CNMI government travel on any flight operated by MSA.

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On July 7, 2022, Stewart informed Atalig that they have already completed nearly all requirements to begin operations by the end of this month. Stewart also told Atalig that they have far exceeded the $1.5 million in costs to start up the airline.

He noted that the Cessna Caravan aircraft delivered to Saipan is owned by Southern Airways and is worth approximately $2 million, increasing the total assets committed to this venture to approximately $12 million.

On Jan. 4, 2023, Stewart wrote to Finance, asking for payment for the outstanding invoice payments due in the amount of $699,748.

Stewart said for the airline to continue operations they need to be paid at least what they are owed on the monthly incentive invoices. He said these monthly invoices amount to $328,707 and that the airline cannot continue providing service without timely payment.

On Feb. 20, 2023, Stewart wrote to Norita, requesting payment of outstanding invoices amounting to a total of $818,923.

Marianas Pacific Express LLC’s statement of account showed that the CNMI paid the company $1.5 million on March 21, 2022; $500,000 on Aug. 22,2022; and $381,891 on Nov. 10, 2022, for a total of $2,381,891.

Stewart said that, as a consequence, Southern Airways, which owns 50% of MSA and who hold the necessary Federal Aviation Administration/Department of Transportation permits to operate as an airline, has notified them that if payment is not made available by Feb. 24, 2023, they will be unable to continue service in the CNMI.

He said MSA has saved CNMI travelers approximately $600,000 in ticket sales since August 2022 alone, by offering fares lower than their competitors, and has more than 30 current local employees.

On Feb. 21, 2023, citing lack of funding, Norita sent Stewart notice of termination of the contract. Norita said it has been determined that there is no funding available for the contract and therefore the government is terminating the contract.

Two days later, or on Feb. 23, Gov. Arnold I. Palacios and Lt. Gov. David M. Apatang announced that the administration terminated the contract as there is just no money to support it.

Palacios said Torres overcommitted the CNMI and overpromised money they did not have and do not have now.