May 26, 2014 Pohnpei, FSM—Pohnpei Utilities Corporation’s debt taking activity has begun to cost Pohnpei State a significant amount of money according to a recently delivered audit conducted by the Pohnpei Office of the Public Auditor. “As of October 15, 2013, PUC owes Pohnpei State Government…$326,033 for loan repayments,” the audit says.
The performance audit looked at the debt levels of the Pohnpei State government and its five component units: PUC, Pohnpei Port Authority, Pohnpei Transportation Authority (PPA), Small Business Guarantee and Finance Corporation, and the Pohnpei State Housing Authority. “The Performance Audit on Public Debt was initiated by OPA in order to determine whether public debt management in Pohnpei State Government and its Component Units is effective and efficient to achieve long term sustainability and financial stability,” the audit says. “Presently, of the five component units of Pohnpei State, only the Pohnpei Utilities Corporation has long term obligations.”
PPA was in the process of considering the possibility of a long term loan to be funded by the Asian Development Bank at the time of the audit.
Auditors say that as of September 30, 2012 there was a total of $16,387,814 of public debt owed by Pohnpei’s primary government and PUC. $6.5 million of that debt was owed by the primary government and $9.8 million was owed by PUC. But the audit says that Pohnpei State and the FSM National government are the guarantors for PUC’s loans. When PUC can’t make its payments the national government can make the payments and then deduct the amount from Pohnpei’s share of taxes collected in the State. It has needed to do so before, catching the State government completely off guard as they had not budgeted to service PUC’s loans.
According to the audit, PUC over projected its revenue for the year by approximately $4.5 million in fiscal year 2012 and was unable to make its payments.
In his response, PUC’s General Manager Marcelino Actouka asked State Public Auditor Ihlen Joseph’s personal assistance in urging the state to process and approve the sewer tariff saying that it would “remedy all your findings and recommendations.”
He wrote that since its establishment and despite a 2006 study recommending it, PUC has never charged a sewer tariff. In October 2013 the PUC Board of Directors approved and submitted a sewer tariff to the Pohnpei State Government. He wrote that no action had yet been taken on that tariff plan. He wrote that payments on a new loan for a refurbished sewer system have already begun but PUC still cannot charge a tariff to help service the additional loan.
In FY 2012 $3.9 million of the shortfall in projected revenues was for cash power projections. PUC had estimated revenue of $18 million but actually collected only $14.2 million. PUC had not projected any losses for bad debts in its FY 2012 budget but actually had losses of approximately $730,000 that year.
Actouka’s response to the audit along with a full explanation said that the State and national governments had not met their obligations under the Tripartite ADB Loan Agreement. He wrote that the payment obligations of the State and Corporation under the agreement are joint and several. “If the Corporation fails to meet any or all payment obligations herein, the State remains liable for same,” he wrote.
He said that under the agreement the FSM was to have established a Trust Account in the name of the State within the national investment portfolio. He wrote that uses of the Trust Account would have included but not have been limited to making payments to the ADB when required for the Coporation’s obligations. He added that the FSM and State never set up that Trust Account.
He made some mention of Section 4 of the agreement on the use of the State’s annual grant under the Compact for public infrastructure projects in an amount necessary to meet the State’s financial and payment obligations for accelerated payment. Unfortunately, that paragraph in his response did not contain a verb and so its intent was unclear. However, he pointed out that Section 10.08 says that the State shall “ensure that the Accelerate Payment Amount set forth in Article IV as part of each year’s annual budget and the Accelerated Payment Amount is appropriated for use each year for the purpose of servicing the State Loan – Special Operations.” He noted that Pohnpei State does not include payment in its annual budget.
Under the heading of “Options Available to PUC” Actouka wrote in terms of PUC’s legal options, “Clearly, under the Tripartite Financial Agreement Article IV…under default conditions, PUC could easily, by financial justification, stop paying for the loan knowing that National Government, as the practice for, pays for the loan with Pohnpei State share of tax. Let Pohnpei sue PUC, however it takes, knowing that we are on strong legal ground.”
He wrote that another option would be to “lobby the Govern and the Legislature to either subsidize the operation and maintenance of the sewer system or pay the loan with a dedicated tax on food and drinks that end up in the sewer system.”
He writes that PUC “management is currently requesting ADB Private Sector Division for assistance in evaluating the potential for water and or sewer systems to be outsourced/privatized.”
Before listing the steps that PUC has already taken to mitigate the ADB payment plan, Mr. Actouka once again points to the need for a sewer service tariff.